This past December has delivered an emotional news cycle where financial and political events collided to create one of the worst performing stock markets for the month on record, and one of the worst years since the Great Recession of 2008.
Despite this, our team at Glass Jacobson Financial Group still believes the underlying fundamentals of the U.S. economy have not deteriorated significantly and the overall outlook should remain positive.
The bad news
From the end of September to Christmas Eve, the S&P 500 Index fell 19.3%, finishing 2018 down (4.4%). What concerns are driving this market downturn?
- The Federal Reserve raised interest rates for the fourth time in December, amidst a projection of lower growth for the U.S. economy and inflation.
- President Trump’s sharp criticism of Fed Chairman Powell’s rate hike.
- Uncertainty over a tariff trade war between the U.S. and China.
- Brexit, political unrest in France and slowing growth in the global economy.
Do these factors warrant the recent market volatility?
Considering these factors, we don’t believe the recent volatility warrants the scale of investors’ losses. This trading cycle has been an overreaction to the bearish sentiment common in today’s investor psyche.
Dr. David Kelly and Meera Pandit (JP Morgan Asset Management) have additional views on what moved the markets: “Evolving market structure has likely played a role in recent market movements. Broadly speaking, there are three primary types of investors in U.S. equity markets: active investors, passive investors and short-term traders who often use computer algorithms and momentum strategies to try to generate short-term profits. Over time, passive investors have grown and active investors have shrunk, and the importance of algorithmic trading has increased. Once momentum algorithms are triggered, there are not enough active investors, who trade on fundamentals, to stand in the way. This dynamic is amplified during periods of less liquidity and lighter volumes, such as the holidays. However, unless these pullbacks are validated by legitimate deterioration in economic conditions, they are unlikely to endure.”
The good news
- Lower oil prices lead to lower gas prices. This alone will stimulate consumer spending and confidence.
- Corporate America is seeing strong profitability. We’ve observed that our firm’s small business owners are doing great.
- The Federal Reserve has already lowered the number of expected interest rate hikes for 2019 - and the market is currently pricing no hikes.
- Long-term mortgage rates have fallen significantly from earlier highs.
- Even in the face of slowing growth, stock prices are not significantly over-valued. The floor of any bear market should be shallow.
What should you do?
Follow your asset allocation strategy and do not panic. This current market tantrum will pass and values will recover as they have before. Remember, investing is a long game. We’re confident in our opinion that recent events are based more on emotion than fact. Please contact us if you have any questions or concerns and one of our financial advisors will follow up with you.
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