Spring 2019 Market Commentary

Steve Lear |

By Seth Meisler, CFA, CPA/PFS, CFP®, BFA™ and Marc Usem

The road to success is dotted with many parking spaces. — Will Rogers

Well, that was fast! The last 15 months have been very interesting indeed. After the tax cut-induced sugar spike at the end of 2017, both U.S. corporate earnings and stock prices surged forward for the first nine months of 2018. In order to restrain inflation and get interest rates to a point that would allow them to intervene if needed, the Fed continued to embark on a quarterly rate-raising program last year. The original intent was to continue raising rates two or three more times in 2019. The tax cuts and revenue growth all became yesterday’s news when investors realized that the economy was starting to slow down.

Markets changed course very quickly, with U.S. stock market indexes dropping by nearly 20% at the end of last year. The low point came on December 24th. At that time, Jerome Powell, the head of the Federal Reserve, stated that they will not continue to robotically raise rates, and that decisions will instead be “data dependent.” And with that, the markets changed course and started surging back up. Whereas last year, all markets went down, this year all major stock markets have been moving up, with the U.S. leading the charge.  For many investors, the losses incurred over last year have been erased and are now positive for the last 15 months. Today, the market is predicting that there is a greater likelihood of the Federal Reserve decreasing rates then increasing rates in 2019. So what does that mean to investors when bad news (the economy) becomes good news (for the stock market)? 

To us at Affiance, the last six months were a great reminder of some timeless investment lessons: 

1. Stick with your strategy and think long-term — The surest way to lose your hard-earned dollars is to abandon your long-term investment strategy. While naturally, your investment strategy must adjust to changes in your personal situation, it is best not to make changes based on unpredictable markets. It is impossible to predict how the Fed will react, whether the trade negotiations with China will be resolved, or whether Britain will actually leave the European Union. As such, having the patience and discipline to stick with a strategy has proven to be one of the best ingredients for long-term success.

2. Make sure you have adequate cash — You never want to be in a situation where you are forced to sell when markets are down. Selling when markets are down locks in losses. Having enough cash to weather a storm allows markets to recover before raising needed cash.

Currently, we believe that U.S. markets are fairly valued. We are seeing signs of a global slowdown, however, central banks around the world are taking action to mitigate the situation. As such, while we believe that the U.S. is in the late stages of the bull market, we expect there still could be more room to run.

In February, we made tactical changes to the portfolios that are in line with our philosophy to be prepared for the unknown or to “dig your well before you’re thirsty.” We believe these changes will help the portfolios continue to participate in growth, but also be more resilient in times of financial stress. While we continue to be cautiously optimistic for the remainder of the year, it is possible that an economic slowdown could lead to a decrease in corporate earnings.  Investors need to be mentally prepared for more volatility over the next several years, as markets adjust to slower growth. As we have said in the past, if you were not comfortable during the stock market drop we experienced at the end of last year, please talk to your financial advisor. There will be more ups and downs. However, we remain confident that stock ownership is still one of the best approaches to growing wealth over the long term.

 

The views represented in this commentary are not meant to be construed as advice, testimonial or condemnation of any specific sector or holding. Investors cannot invest directly in an index. These unmanaged indexes do not reflect management fees and transaction costs that are associated with some investments. Past performance is no guarantee of future results. To discuss any matters in more detail, please contact your financial advisor.