In light of continued “turmoil” in the US stock market (this was written on December 21, 2018), we felt it might be time to weigh in and provide some talking points to support your client conversations. It will not be long before we provide our quarterly commentary, which will dive deeper into some of these items, but in the meantime here is a synopsis.
- The Fed continues to raise interest rates given a persistently upbeat economic outlook. While there was certainly a case for not hiking rates (e.g. inflation is mild) there was also a case to hike as they did (e.g. labor market is still strong). Clearly the market sees it differently from the Fed. As a reminder, the Fed’s goal is to provide for stable prices and healthy employment, not to make the stock market go up or down.
- Additional uncertainty around trade tensions with China, a potential government shutdown, Brexit, and the military withdrawal from the Middle East has also weighed on investors’ confidence. Taken in concert, it’s difficult to imagine the markets wouldn’t feel at least a little gloomy. Markets don’t like uncertainty.
- Anecdotally, we believe that loss-harvesting may have also contributed to December’s decline.
- All that said, we have to remember that the Dow Jones and S&P do not fully reflect our recommended portfolios. It can be little consolation, but relative to the -16% for the US market (Russell 3000) so far in the 4th quarter, a diversified portfolio will have weathered the storm better than the headlines. Over the same period:
- MSCI EAFE is down 12.9%
- Emerging Markets are off 8.2%
- Bonds are up 1.5%
- Also, to put this into historical perspective, the following chart shows that intra-year declines in the S&P 500 (the red dots) have occurred EVERY YEAR since 1980, averaging -13.8% and ranging from -3% to -49%. Despite the regularity of market sell-offs, the index finished the year positive 76% of the time.
- This is not an attempt to paint a rosy picture since there is no way to know where we go from here. But we have to make sure we accept the probability, or certainty, of this type of environment from time to time. As long as we are positioned appropriately in advance, staying the course is the recommended course of action, however mentally and emotionally challenging it can be. Having these conversations with clients, in good times and bad, helps set them up for long-term success.
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XY Investment Solutions, LLC (“XYIS”), through its partnership with East Bay Financial Services, LLC (“East Bay”), builds investment models through a technology solution, and supports financial planners with investment strategies based on research, experience, and sound rationale. XYIS primarily allocates client assets among various mutual funds and/or ETFs. XYIS may also allocate client assets in individual debt and equity securities, options and independent investment managers. XYIS's services are based on long-term investment strategies incorporating the principles of Modern Portfolio Theory. XYIS manages client investments in portfolios on a discretionary basis.
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