Have you ever met or approached a professional at a social event and been tempted to ask a personal question that relates specifically to your circumstances?
We know we have.
Whether it’s a physician, attorney, or CPA, when in need of assistance, we benefit from receiving additional insight from the experts. Of course, you typically want to shy away from any direct questions. But the temptation sometimes arises.
While reluctant to pry a bit of free information from someone who has painstakingly developed their specialized skill set, we find most are very open to discussing financial planning when we are out and about. For starters, we truly enjoy what we do and receive a tremendous amount of satisfaction assisting those who seek our advice.
However, there is one topic we’ll shy away from–and it’s one we get questions about quite often: Where do we believe the market is headed?
Long term, stocks are an integral part of most portfolios, and the historical data bear this out. But many folks who ask for our opinion want to know the market’s direction over a much shorter period.
Questions such as: “What’s going to happen after the U.K.’s Brexit vote?” Or, “how will stocks perform before and after the election?”
We understand the inquiry. Financial advisors have their fingers on the pulse of the market, the economy, and there is this expectation that we have some sort of inside information.
Although we did not expect what happened in Europe to have a lasting impact at home, admittedly, we were surprised by the sharp bounce in stocks and subsequent all-time highs in the Dow Jones Industrials and the broader-based S&P 500 Index.
In some respects, the political earthquake in the U.K. shook up our markets for just two days before cooler heads prevailed and shares began an upward ascent.
While we have reiterated in the past that we have no magic crystal ball (and let us remind you, neither does anyone else), we’d like to take a moment to explain why our approach leans heavily on diversification and eschews market timing.
Irving Fisher was called “the greatest economist the United States has ever produced” by none other than Milton Friedman, who won the 1976 Nobel Prize in economics.
Yet, Fisher’s record is stained by his 1929 remark that “stocks have reached what looks like a permanently high plateau.” Making matters worse, his comment came just three days prior to the crash (CNBC: “Spectacularly Wrong Predictions”).
"By itself, a new high isn't a reason to sell."
Every so often, we’re reminded of another blunder from Business Week.
In 1979, the respected periodical ran a cover story entitled, “The Death of Equities.” The article included this line, “The old attitude of buying solid stocks as a cornerstone for one’s life savings and retirement has simply disappeared…The death of equities is a near permanent condition.” (Forbes: “6 Doomsday Predictions That Were Dead Wrong About the Market”).
Three years later, stocks went on an 18-year bull run.
While we could continue with the anecdotes, the above examples illustrate that market timing is ultimately an exercise in frustration and is likely to be a detour that takes you further from your financial goals.
AN ALL-TIME HIGH - HOW SHOULD I REACT?
During July, the S&P 500 Index finally eclipsed its prior all-time closing high set back on May 21, 2015 (St. Louis Federal Reserve).
By itself, a new high isn’t a reason to sell.
Since the bull market started in 2009, there have been 45 record highs for the S&P 500 Index in 2013, 53 in 2014, and 10 in 2015 (LPL Research). Since topping the prior high on July 11, the S&P 500 has gone on to close at six more highs during the month (St. Louis Federal Reserve).
Again, by itself, a new high isn’t a reason to go to cash.
What we do counsel is to avoid emotionally based decisions. In our experience, they rarely work.
A LOOK BEHIND THE CURRENT RALLY
It’s somewhat counterintuitive, but a post-Brexit world may actually be helping stocks in the U.S., as nervous cash in Europe seeks safety in the U.S.
But it’s not all gloom. While the U.S. economy is expanding at a subpar pace, it is growing, and the consumer is leading the way (U.S. BEA), which supports corporate earnings.
Speaking of earnings, once again Q2 earnings are topping a low hurdle (Thomson Reuters). More importantly, analysts are cautiously forecasting that the four-quarter earnings recession appears set to end in the current quarter.
Finally, a cautious Fed has been a plus for equities simply because low interest rates create less competition for stocks. If we were in a recession and profits were sliding, low rates would likely do little to support equities, in our view. But again, the economy is expanding, albeit modestly.
WHAT'S AN INVESTOR TO DO?
We recognize that we are in an uncertain period. As the economic recovery enters its eighth year (National Bureau of Economic Research), the expansion is no longer young.
It’s been a substandard economic recovery, global uncertainty is high, and we are in an unusual election cycle.
One of our goals has always been to assist you as you reach for your financial goals. That is why we strongly encourage a diversified portfolio that encompasses assets in the U.S. and abroad.
As we’ve mentioned in previous writings, we will eventually enter a recession, and recessions have historically brought about a downturn in stocks. We don’t know when it will happen, but it will. It’s an inevitable byproduct of a free market economy.
While declines in the major averages that exceed 20% can be unnerving, they have always run their course historically, setting the stage for another upward cycle that takes shares to new highs.
As always if you have any questions, we encourage you to contact us.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly.
Economic forecasts set forth may not develop as predicted.
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
This research material has been prepared by HorsesMouth