Markets Yesterday, Markets Today
All eyes have been on the Federal Reserve and the potential trade war with China. December was a tough month in the market - no doubt. But not too dissimilar to what happened just two years ago.
Two years ago, the market was in a state of confusion. There were fears about what was going on with oil, and with the numbers coming out of China. There was hesitancy about valuations of US companies. There were mixed reviews with how the Federal Reserve would proceed on monetary policy. There were concerns that we hit our 7th year coming out of a recession and that market cycles typically operated on an 8 year cycle.
By mid January, the Dow Jones Industrial Average (generally regarded as the pulse of the US stock market) was down 10%. China’s stock market was down nearly 20% and crude oil was priced below $30 a barrel, down over 50% from its peak in 2015. Yes, this is great for buying gas, but not so great for the market. We had never had such a bad January before and here we were participating in the worst start of the year that the US market had ever seen.
Today is not too dissimilar. Over the past year, the Dow is 11% off of highs, China 26% and Crude oil almost 40%.
But the fact is, it pays to stay invested.
In 2016, the market lulled from mid-January through the start of February. February 2nd to be exact. And then suddenly the uncertainty stopped. Both the S&P 500 (the stocks represented by the 500 largest companies in the United States) and the Dow Jones Industrial Average climbed 4.3% for the week, which was the S&P 500’s biggest gain in more than five years and the best performance for the Dow since the 2016 presidential election. For the remainder of 2016 and 2017, markets rallied again and again to all-time highs at record low levels of volatility. Even with the ups and downs of 2018, had you sold on February 2nd of 2016, you would have missed out on 45% of gains.
Is today any different?
Cristina and I start off every week with our Advisor Study Group stating our Two Wins & A Loss. Let’s do the same for the market.
Wage growth: wage growth has been positive, meaning that people are actually seeing their wages increase year over year. People with more money tend to spend money (60% of Americans spend more than what they make). Consumption is good for business. Consumption represents almost 70% of GDP. We show the graph for retail sales, which continues to have positive momentum and make all-time highs. Both of these are good signs.
Interest rates: interest rates are at 5000 year lows. Yes - 5000! This means it’s easier to afford things that are funded with debt. Over the past few years, many businesses have used this as an opportunity to invest in capital expenditures. An example of this is General Motors, who recently reported a positive outlook for 2019 based on expenditures they were able to make over the years of low interest rates. Here’s a fun chart of 5000 years of global interest rates.
And A Loss
Housing: When people buy new homes, it’s great for the economy. If you think about it - when you buy a new house (shout out to some of our clients!) you spend money on the house. You have to fix everything up so it’s liveable, but you also might buy new furniture, appliances, and other expensive items. Might be tough on the personal MoneyFlow, but positive for the economy. As a result, new home sales are a leading indicator of what’s to come. New home sales peaked in November 2017, which is 14 months ago. Over the past 50 years, at least 11 months has lapsed between new home sales’ expansion highs and the start of the next recession.
Stay the Course
We are always in pursuit to understand the factors that make or break the market, but in reality it’s our view (along with a lot of really smart people) that we shouldn’t try to time the market. The below chart shows you the S&P 500 from December 31, 1996 through the end of last year. The S&P 500 grew from 741 to 2,507 - gaining almost 340%. But along the way, it lost 50% of its value two separate occasions.
Looking back even further in history, we can see that even intra-year, the market can be quite volatile. If we look at Jan-Dec on an annual basis the market is generally up, but intra-year the S&P 500 dropped 13.9% on average between 1980 and 2018. Even when there are more extreme moves, moves that would be classified technically as a bear market (20%+), this isn’t a perfect indicator of what’s to come. In 1987, where the stock market dropped 34%, but ended the year up 2%.
As advisors, we pay attention to everything that’s going on in the world, but it’s also our job to help you figure out your time horizon for your most important life’s goals so we can help you stay the course. If you had feelings of anxiety or confusion during December because of what the market was doing to your portfolio, please reach out. We are always here to answer any questions and to help position you (and your portfolio) to enable you to achieve your life dreams.