As we head into the last weekend before Christmas, the news outlets are busy trying to distract us from what should be a joyous time with fabricated stories of impending doom and gloom. Once again we would like to be your antidote to misinformation.
For the last 40 years, the US stock market has averaged a 14% temporary “sale” from peak to trough each year. So the current sale is about average. While anything can happen in the short term, history suggests this one is getting long in the tooth.
Lost in all of the noise from the is that our economy is booming. Corporate profits are at record highs and growing smartly. Corporate and Consumer balance sheets are in very good shape. Unemployment is the lowest it has been in half a century and appears to be headed lower in 2019.
Based on current earnings, stocks are some 15-20% below their long term average price to earnings ratio. Moreover, earnings are expected to grow significantly next year (and beyond). Added to that we have interest rates at multi-decade lows. So compared to stocks, bonds are historically expensive.
Our more than three decades of experience plus our extensive study of market history has taught us several fundamental signs of market behavior. Now let’s examine non-data driven fears:
The media likes to fear monger about the imminent danger of a recession with the implied suggestion that a major market decline will accompany it. The media will predict a looming recession nearly at all times. They get downright gleeful when the economy actually enters one. Then for years after the recession they write articles about why we are still in one. Finally they reluctantly switch to predicting that the economy is about to slide back into the dreaded “double-dip” recession (which has never actually occurred).
Our experts agree that we are unlikely to see a recession before 2022, if then. Additionally, recessions don’t jump out of nowhere in the midst of a growing economy with low unemployment. Please note we would not be likely to significantly change your financial plans in the event of a recession.
What most people fear is a market decline of above average size and duration. These only occur after periods of time where people stop fearing them and become “exuberant” about the money they’re making in the market. Thanks to the panic decline of 2008-09, individuals have remained ultra cautious. People panicked out during that decline and we know that many have not reinvested, despite the recovery and further substantial gains. In fact, those who remained have sold even more along the way. At the same time, institutions (pension funds, hedge funds, endowments, etc.) dramatically reduced their stock holdings in 2008-09 and have sold much more since. History continuously reminds us that the actions and opinions of individuals and pension fund managers are not predictors of major declines.
As our clients you should remember this – through your growth oriented portfolios you are owners of more than 1000 of the world’s biggest companies. The true value of these companies has not permanently declined 10% or more since October because (a) a guy on tv said the Federal Reserve is raising rates too fast, (b) the economy of the largest communist country has slowed it’s dubious growth rate a little, (c) some obscure indicator from some “expert” flashed a danger sign, or (d) any other reason. The stock market has fluctuations every year. 2017 was unusually calm. This year is more normal. 2019 is the third year of the presidential election cycle. For the last 72 years, every third year of that cycle has been positive.
This decline, like all those before it, is likely to be a distant memory a year from now and something you’ve forgotten entirely about in 3 or 4 years. Do you remember the vitriol spewing from the financial “experts” on TV when the market declined nearly 20% in just a few trading days back in 2011? No? Good, we’re glad! Your reward for ignoring that has been a growing portfolio and your reward for ignoring the current noise will be the same.
Your plan has been created for you to weather these temporary fluctuations and allow you to live without worrying about your money, whether you are building a nest egg, about to retire, or already enjoying your retirement.
This holiday season, ignore the “pouting pundits of pessimism” and focus on your loved ones and all that we have to be thankful for!