The Current Market Environment
Written by Jim Englert, CFP®, EA, President and CEO
One of the risks of writing about the stock market is that it is constantly changing. With that said, the following was written on December 20th, 2018.
So far, 2018 has resulted in a negative year with year-to-date results as follows: the S&P 500 began the year at 2673.61 and it is currently at 2472.52. The highest closing price on the S&P in the past 52 weeks was 2928.67, which occurred on September 21st, 2018. At that point, the S&P was up +8.67% year to date. Today, the S&P 500 is down -8.28% year to date, and -15.60% from the high point in September. All of the equity (stock) indexes are experiencing similar results.
The following illustrates the year-to-date stock chart for the S&P 500 ETF (Source: StockCharts.com).
There are so many possible influences including Brexit, Federal Reserve policy, tariff negotiations, tax reductions, increased spending, reduced regulation, etc. With so many different factors, it is difficult to predict what will influence the market. Sometimes the market chooses to ignore these influences, and sometimes the market reaction is severe. We do know that these influences will have some impact on the market—either up, down or sideways, but it is important to note that these influences are most important in the long term. Intermediate-term can have some impact but not necessarily on the long-term. Short-term influences are just noise and, unless you are a day trader, best ignored.
As an investor, it is important to focus on the long-term rather than on the short- or even intermediate-term results. The following chart shows the same S&P 500 ETF as shown above, but with a different and longer view (Source: StockCharts.com). This chart looks at the last three years. As you can see, the most recent period just looks like a pause in an otherwise upward trending market. If your time horizon is long enough, this normal market activity should not be of a concern, since the long-term trend remains upward.
We have discussed asset allocation in previous articles. Generally, asset allocation is used so the investor has a portfolio that is diversified in several classes of investments, such as bonds and equities. Bonds and bond funds are invested in instruments where, in effect, the investor is a lender, allowing an entity to borrow money. In return, the borrower gives the lender payments in the form of interest. When an investor owns stock (also known as equities), the investor actually becomes an owner of a piece of a company. The stock investor participates in ownership by experiencing an increase in value as the market drives the stock price up, but also experiencing a decrease in value if the market drives the price down. A stock investor may also receive dividends paid out by the company to its owners.
Asset allocation is used in the design of a portfolio for multiple reasons. These reasons include diversification, managing volatility, and the ability to participate in multiple types of investments. Most of the time, when stock investments increase, bond funds either stabilize or go down in value. Conversely, when stock investments lose value, bond funds generally increase in value. This is due to the low correlation of these broad investment categories. There are some years, however, when both bonds and stocks go either up or down in tandem. There were times during 2018 when we experienced both conditions.
2018 will go down in history as a negative year in most markets. As we consider the long-term, negative markets do occur, but the general trend of the investment markets remains positive. It is especially difficult to see volatility and a negative year after 2017, a year where we experienced a solid upward trend with minimal volatility.
I am reluctant to predict what 2019 will bring. Volatility appears to be here to stay. We remain invested in our buy-and-hold strategies because of the long-term upward trend that markets have enjoyed. It is important to remember that the talking heads on CNBC and other networks sound like they speak authoritatively, but the reality is that nobody knows what the market will do from day to day (short-term). The point to remember is that short-term or even intermediate-term market activity has little meaning for the long-term investor. It becomes a reminder that if your financial objectives are short- or intermediate-term, the investments used to achieve these objectives need to reflect the volatile markets we now face. If your financial objectives are long-term in nature, the volatile markets will deliver as long as these markets maintain an upward trend.