With this recent market rally, up about 12% on the S&P 500 since the December 24 close, I wanted to give an update on current market conditions. Since the 9/21/18 high of 2940 on the S&P 500, we are still down about 10% as of my writing this on January 17. That’s a fairly painful drop in about 4 months, but not too much different than the almost 12% pullback In January and February of 2018, or the 14% pullback from November through February of 2016. The peak-to-trough this time was worse, to be sure, but this one seemed to feel worse.
I think it felt worse because it felt out of control. There were no breather days, to speak of, and the selling just seemed to get worse every day. No one had a great answer for why it was so bad, and I think that’s because there was no ONE reason, but several reasons that compounded. The mid-term election brought with it the fear of impeachment; trade talks with China seemed to have no resolution; the Federal Reserve was raising interest rates; earnings estimates for US corporations were being ratcheted down for 2019; and the word “recession” started to get tossed around. Add those factors into a year when many investors had capital gains from stocks they had sold early in the year (or had gains distributed to them from mutual funds) and needed to sell stocks at a loss to offset those gains, and it created a nasty selling waterfall.
Really, the only one of those that has really changed is the tax-loss selling. Once the urgency of 12/31 disappeared, the selling pressure did, too, for the most part. However, we are still left with impeachment worries (assuming they ever re-open the government…maybe THAT’s why it’s still shut down!), trade and tariff concerns, lower corporate earnings estimates, and recession fears. Of those, I believe that the impeachment fear has been factored in. Trade gridlock has influenced future earnings and a potential recession, and the Fed seems to be a little less inclined to raise interest rates, or at least not to raise them as much as had been feared.
So I think that the S&P 500 will have trouble moving much higher than this, for now, at least. Investor expectations should probably be somewhere in the -10% to +10% range for 2019, meaning that we may already have seen ½ of our expected upside. For now, I think the wind is behind us, so I believe that downside is limited. I have mentioned this to many of you in phone conversations, but I think that mid-year is probably an appropriate time to consider de-risking your portfolio, from an investment standpoint. Of course, if you’ve already had us prepare a Signature Life Plan to help determine your optimal asset allocation, then that will be our starting point. If not, I encourage you to speak with us soon. As the saying goes, “Noah didn’t wait for the rain to start building the Ark.”
As always, these recommendations are mine, and may or may not be the same as those of Raymond James. This is not a solicitation to invest, although we do invite you to review your portfolio with us to see if any changes should be made.
Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk including the possible loss of capital. Asset allocation and diversification do not guarantee a profit nor protect against loss.