Dear Clients and Friends,
We at TWPM wish you and all your family a wonderful, happy and memorable holiday season. It has been a pleasure serving you in 2018 and we look forward to working for you in 2019.
The new tax law has created significant changes that are likely to impact many of our clients. Most likely for most, the impact may be positive. It might be wise to review your tax situation for 2018 with your tax advisors prior to the end of the year to see if any adjustments need to be made. For those making quarterly payments, it could be that you may owe less than you originally estimated. You may also want to discuss with your tax advisor possibly adjusting your payroll Federal Income Tax withholdings for 2019. This could possibly result in larger take-home pay for 2019. While it may be tempting to use the income tax system as a forced savings program, that is seldom in a person’s best interest, if ever. If you would like to discuss this, please, contact us. As always, TWPM does not give tax advice so, please, consult with your CPA or tax advisor on all tax-related issues.
Markets, Economy and High Water Marks
The Markets have been very volatile lately. Hundreds of points move on the Dow Jones 30 Index have become almost a daily occurrence. This is unnerving to a lot of people and understandably so. Some of the volatility is due to automated computer trading, which tends to exacerbate any market movement as the algorithms try to make fast profits, often only a penny or fraction of a penny per trade.
It should help to calm nerves to keep things in perspective. In 2016, the S&P 500 closed the year at a level of 2,238.83. Yesterday (12/19/18), it closed at 2,506.96. From the start of 2017 through yesterday, that means that the S&P 500 is up approximately 11.976%. Despite all the volatility, that means that the S&P 500 has averaged just a little less than 6% per year. Yet, all of us have a tendency to feel like the market is down.
It really depends on where one begins gauging. Most humans have a tendency to measure not from the beginning of an investment, but instead they tend to measure from the high water mark, or the highest point in their portfolio value. Using the S&P 500 as an approximation for a stock portfolio, the recent high water mark was 2,940.91. From that high, an all-time high, the S&P 500 is down 14.76% through yesterday (12-19-18). Measuring from the recent high, of course the index is down; yet, measured over nearly two years, it is up almost 12% and annualizing at almost 6% per year, three times or more than what one could earn on a CD. So, in volatile times, it is wise to take a longer-term perspective. It is never fun to be down from a high water mark, but investing is not about having fun, it is about increasing value over time.
Is the market going to keep going down? It is impossible to say for sure, especially in the short-term. However, buying and owning stocks of good companies that make a good product(s) that people want and need to buy has proven to be a very good way to grow wealth over time.
Stock prices usually move with the economy. Beginning in 2016 after the Presidential election, the stock market began to price in many good economic things, based on policy projections. Some of these were lower tax rates for corporations and individuals leading to more corporate and consumer spending, less regulation, allowing tax advantages to repatriate corporate earnings held overseas back to the US, etc. No political opinion is being stated here, the comment is on the overall opinion and result of the market participants, investors. The good expected outcomes on corporate earnings, and thus for stock prices, was priced into the markets very quickly and throughout 2017, anticipating good results in 2017 and 2018. Because most of those good results were priced into the markets in one year, it makes some sense that 2018 would be mostly flat.
The economic news continues to be quite good. This is evidenced by the fact that the Federal Reserve decided the economy was still strong enough and expanding enough to raise interest rates again yesterday. Taking away the emotion, the fact that the Fed sees economic news and interprets on a level most of us cannot do should indicate to us that the economic news is good. Good economies usually cause corporate earnings to rise, which generally causes stock prices to rise. Most of that good news was priced into the markets, though, in 2017. Now, markets are waiting to see what is next. Yet, a report this morning seemed to indicate next year’s corporate earnings are expected to rise between 7% to 9%. This is why quite a few analysists are predicting high single-digit stock market increases for next year.
Given the fast and hard movement upward in a single year for the stock market, culminating in reaching an all-time high, a correction of pricing is really quite logical. A stock market “correction” is a term that generally refers to a decline of 10% to 19.9% from a recent high. As of yesterday’s close (12-19-18), the S&P 500 is down from the recent high by 14.76%, a classic correction decline. Given current economic projections, there seems at this time to be no reason to think this is anything more than a classic, textbook correction. One of the indications of a correction in addition to the percentage decline is increased volatility.
Based on its history, the Federal Reserve is likely to raise interest rates high enough to cause a recession. Some economists are forecasting a late 2019 or 2020 recession, mainly due to the Fed’s actions. This may yet come to fruition, but it is likely too early to position too strongly for this.
So, what should investors do? As always, review the long-term strategy. Take a step back and look at the longer-term picture and see if things are as bad longer-term as they might feel shorter-term. Realize also, that for TWPM clients, we are not only following long-term strategies but we do make tactical adjustments. For many clients, we have raised cash over the past weeks and months to attempt to dampen some of the volatility and to position to take advantage of a rebound. For some clients, where appropriate, we have been adding bond exposure.
For those with 401(k)’s or other employer-sponsored, payroll contribution plans, we encourage that most just stick to their allocation and contribution plan. This is because the regular contributions in a down market allow for buying more shares. Historically, declines, even bear markets and recession markets, rebound and begin to increase in value again. When this happens, the 401(k)-type investor will likely benefit from having acquired more shares at lower prices. I often say, “Wall Street is the only store where no one wants to buy when things are on sale.” An employer-sponsored, payroll funded plan has proven to be an effective investment vehicle to take positive advantage of market volatility.
For our TWPM clients, we encourage you to contact us any time you have concerns or questions about markets or your portfolio specifically. We also encourage you to recall that our financial planning and positioning of the entire portfolio is based on a long-term, goals-based strategy. That strategy incorporated into it the expectation that bad markets and down return years will occur. Therefore, situations like the current correction, seen in light of the long-term plan, are just part of the plan and are not to be feared.
(Past performance is no guarantee of future results. That has to be said.)
Again, we wish you all a wonderful holiday season and a healthy and prosperous New Year!
Richard Tomes, CFP®