Welcome back to the 2018 stock market roller coaster ride!
Between the twists and turns and the extreme moves higher and gut-wrenching drops, this market is anything but boring.
A couple of things: First, last week our new Federal Reserve chair, Jerome Powell
, announced that they're raising rates a quarter of a percent, and the Fed is expected to raise rates two more times in 2018. Our expectation is that this will continue to pressure the price of bonds, as rising interest rates are typically not good for this asset class.
In addition, the Fed shares some concern about the moderate inflation we're experiencing, and I know a lot of people think we're heading towards runaway inflation. While I would argue that inflation is preferable to deflation, I don't see anything to indicate runaway inflation at this point in the cycle.
Within the equity markets, they've been topsy-turvy, and as of this writing, the Dow had returned to its low, set on February 9. On Friday, March 23, we did go into our Envestnet models and take the 15-19 percent cash we'd built up over the previous month, and put that money to work in good, solid US companies. For our clients who have Envestnet accounts, you likely received a few trade confirmations. Please keep in mind we'll be sending out an Envestnet update next week with our thoughts on the particular trades, after the end of the quarter. I've told many of you as you've come in for your update meetings that we raised cash in your portfolio after the last 1000-point run of the Dow, the idea being that, when the markets were down, we could go shopping. And that's exactly what we did.
The question everyone has is, is this a good place to buy, or is this the first step toward a recession? From my perspective, I wanted to put more money to work, because I do believe that the US economy is growing, and that the Fed raising rates will be good for banks and insurance companies. I also believe the tax changes will create growth in consumerism and consumption of all things American (and all things made in China for Americans), and this consumption should be positive for a consumer-driven economy.
At the end of the day, I admit that while my guesses may be better than yours, I don't have a crystal ball that tells me what will happen. To play devil's advocate, sure, stock market corrections often are looked back at as the precursor that foretells the next recession. Folks are going to get their first quarter of 2018 statements in the next 7-10 days, and I'm pretty sure Family Financial Partners' clients will be pleased with how their portfolios have held up.
But for those of you who aren't Family Financial clients, when you consider the psychology of a person who was happy until they opened their quarterly statement, and now those losses are printed right there on paper, it becomes reality in their mind. And, the pain of that loss could carryover into that person not spending as much, and taking one less trip, and knocking a few days off the trips they do take, or downgrading from Disney World to Holiday World, and putting off that new car purchase, and not going out to dinner as often, and not giving as much to their church because they don't have as much. And lastly, they may not renew those UK football tickets. (Well, that might not be a great example because honestly, who really wants UK football tickets?)
The point is that when consumers start to feel like they have fewer assets, they typically consume less. And in a consumer-driven economy, when less is consumed, it puts a strain on the economy as a whole, and economic growth starts to slow. As growth slows and the Fed is raising rates, which also works to slow the economy, suddenly we start to see data that suggest the economy is slowing, consumer confidence is down, and then people really start to worry. And as they worry, they go back to step one: open their statements, feel bad, talk gloom-and-doom with their neighbors, hear about a friend getting laid off (from a place other than Lexmark), fear for their own job, close their wallets. Rinse and repeat.
Then next month, the GDP is down, confidence is down, unemployment is up, and...you get the point. We have a baby recession. For how long? For however many negative statements are opened and read.
Now, I'm not trying to make light of the idea of a recession. It's a stressful thing and it's scary when people are out of work. I don't wish that on anyone. But while nobody can predict until after the fact that a recession is going to occur on a given date and time, we all know that in the history of our country, we teeter-totter from boom to bust, and the closer you are to being on a fixed income (retired), the more defense you have to play versus others who can take more market risk. And as always, we are doing our best to make sure the assets you saved by delaying gratification don't go up in smoke.
As always, we will continue to monitor Mr. Market's action, and we are trying to invest prudently in high-quality companies that we believe are of good value in today's markets. Keep in mind in 2018 that a new record will be set for Fortune 500 stock buybacks if everyone who said they would buy, does. Around the end of the quarter and right around the time companies report their earnings, many buyback plans are not allowed to purchase their own stock. In my opinion, this may have led to some of the recent market pressure we've seen in the last week.
If you have any questions for me, feel free as always to give our office a ring, and they'll track me down. Until next time.