For the first eleven months of 2018 the stock market returns were slightly positive, but with a lot more roller coaster volatility than we have experienced in recent years.
In typical years, the pattern in December is for markets to be positive, and we’ve often experienced a “Santa Claus Rally” coming into the end of the year. However, 2018 is ending with a big thud instead.
If you are like those of us here at Dickinson Investment Advisors, we are scratching our heads in dismay as there was very little warning that the Grinch would be arriving in town.
What in the world has happened?
- Economic growth remains strong in the 3rd Quarter at 3.5% and the 4th Quarter is estimated to be at 3.62%.
- Consumer sentiment and confidence looks positive.
- Retail sales have been strong. Christmas spending was up over 5% year over year.
- Labor markets are strong with unemployment in the 3% range. Wage growth is likewise trending higher.
- Gas prices are down.
- Corporate profits have been impressive.
Negatives (including our speculation as to why markets are so nervous):
- Combine these two global influences:
- Declining oil and other commodity prices – which may be signaling a possible global slowdown.
- White House chaos and seemingly never-ending new tariffs.
- Combine these two factors that put pressure on corporate profits:
- Wage pressure that will decrease corporate profits.
- Rising interest rates that will also decrease corporate profits.
- However, we believe the biggest negative factor is this:
- The Wall Street Journal (Wednesday, December 26, 2018) reported that “Behind the broad, swift market slide of 2018 is an underlying new reality: Roughly 85% of all trading is on autopilot being controlled by machines, models, or passive (index) investing formulas, creating an unprecedented trading herd that moves in unison and blazingly fast.”
There are always negatives. Without any negatives (headwinds), investors would all be abundantly rich. Instead there is typically a tug-of-war between positive and negative economic attributes and the laws of supply and demand that establish the appropriate prices of assets.
Our Advice to Investors
Our advice to investors is that computers and robot trading can influence short-term market prices, but true fundamentals still set long-term pricing trends. When markets get wild, investors need to step to the sidelines and avoid getting run over. Buy and hold still works. Setting your risk tolerance in advance through the adoption of an appropriate risk model is far better than trying to execute a reactionary plan after the fact.
No one likes swift and violent market price declines, but with every storm comes a silver lining.
We have not experienced a bear market correction for over ten years. Most everyone was anticipating a recession and a correction sooner rather than later. Unfortunately, this can be a self-fulfilling prophesy. Hopefully we are at the beginning of the process of getting this out of the way.
We will close with these final thoughts: It might feel as if the proverbial floor has fallen out from under your portfolio. As prices decline most investors feel as if risk is increasing. However, in reality as prices decline, risk is decreasing. Coming into 2018, stock market prices were near historical highs, which in our minds were not overly dangerous given all the economic positives being recorded, but were still high enough to cause some concern. With the recent shock, stock market prices are at five-year lows and slightly below historical averages. Our markets are based on individual investors acting as opportunists. So, as prices decline, bargain hunters will start to emerge.
Ron Dickinson, CFP®, CPA, MPA-Tax
[Financial Planning and Investment Management Services offered through Dickinson Investment Advisors, Registered Investment Advisor. Statistics and market information provided by Litman Gregory Advisor Intelligence.]