Be prudent, and don’t panic, amid market fall
Over the past year, investors have nervously eyed the stock market, waiting for the moment the long-awaited downturn finally arrived.
As you probably know by now, stocks tumbled in October. The Standard & Poor’s 500 index declined nearly 7 percent. Trading volume was heavier than in September, meaning big institutional investors, such as mutual funds, pension funds, insurance companies and banks, were selling more than they bought in September.
It’s unnerving and often upsetting to see your account values decline, particularly if you are retired or hope to retire soon. It doesn’t help that the financial media thrive on times of market volatility, regaling you with panicstricken headlines about each day’s trading action.
It’s been an emotional roller coaster, no question. Also, there’s absolutely more potential to the downside — there always is. I’ll detail some possible catalysts for the market jitters, but it’s important to remember: Pullbacks are a normal part of investing. Since 1980, the average midyear pullback is 13.7 percent, from peak to trough. As of late October, we have not yet seen that level of decline.
Half of all the years since 1980 saw at least a 10 percent correction midyear, and 13 of 19 years had positive returns. In other words, markets rise more often than they decline, and we hadn’t even experienced the “average” drawdown in October, but I realize that’s very cold comfort when you are concerned about your financial future.
Here are some events that might have triggered October’s pullback.
Interest rates and Federal Reserve policy. Federal Reserve Chairman Jerome Powell made somewhat hawkish comments in October that rattled markets. Stocks have performed well in the face of eight rate hikes by the Fed since late 2015, but recently, Fed officials speaking to the media predicted a continuation of rate increases. Investors may be growing nervous about an overshoot on rates that could put the kibosh on economic growth.
Speaking at an event in Washington in early October, Powell said, “Interest rates are still accommodative, but we’re gradually moving to a place where they’ll be neutral.” The Fed may be aiming for a rate that neither restrains nor encourages growth. “We may go past neutral,” he added. “But we’re a long way from neutral at this point, probably.”
China, tariffs and global growth are causing uncertainty. These may be the biggest culprits behind the latest round of volatility. For U.S. firms that conduct a substantial amount of business overseas — and that’s all the largest domestic corporations these days — we may see a slowdown in earnings growth as 2018 wraps up.
The trade tariffs, which investors essentially dismissed a few weeks ago, have taken center stage. This renewed attention may stoke greater fear, which could slow growth among some industrial companies and boost inflation in the U.S.
Possible 2019 slowdown. Most economists are not predicting a recession next year, but don’t be surprised if we see slower economic growth. Already, we’re seeing slower sales of new homes and new cars in some regions of the U.S. Because the stock market is a forward-looking indicator,
we’re likely seeing some evidence that investors are pricing in these declines.
So what does all this mean for you? It’s wise to shore up your stock and bond holdings. This does not mean panicking and selling everything. Particularly if you have nontax-advantaged accounts, selling out could result in a huge capital-gains consequence.
Instead, evaluate whether your account is out of balance after the nearly decadelong rally in stocks. If you have not reviewed your allocation in a long time, you may find it’s no longer appropriate for your situation. Perhaps you invested aggressively in a 401(k) or similar qualified account while you were working, and you’re now retired. It may be time to assess whether your decade-old asset mix is right for you now or whether you need to dial down the risk.
In an environment of rising interest rates, it’s crucial to understand the duration and credit quality of your fixed income holdings. Because stock investing tends to be glamorized and gets the lion’s share of media attention, investors overlook the bond side of the portfolio. I often meet with people who abhor the idea of junk bonds, because of the risk, yet a portfolio analysis reveals junk bond funds hiding behind names like “Capital and Income Fund.” It’s not always easy to tell what you own, so a thorough review is advisable.
Finally, be sure you don’t have too much overlap that could add unnecessary risk. For instance, plenty of people like holding shares of Apple, but don’t realize they hold large positions in Apple already if they own an index fund or an actively managed fund containing large U.S stocks. It’s not necessarily a problem to own shares of single stocks, but it’s important to understand what kind of risk they add to your overall asset mix.
There’s no such thing as being overly cautious when it comes to your investments and retirement planning. Take some steps ahead of a true bear market to protect what you have, and be sure your investments are aligned with your goals.