After big ’17, 401(k) gains likely to be muted
Stock market moving ‘sideways’ gets blame
Last year was nirvana for retirement investors, but don’t expect a repeat in 2018.
The stock market surged nearly 20% in 2017 and had very few bumpy stretches, despite uncertainty over White House policy, damaging hurricanes, interest rate hikes and a North Korean nuclear threat.
But 2018 has been rockier for the 9year-old bull, even with a stream of stock-friendly news, such as corporate tax cuts, the best corporate profits since 2010 and an easing of tensions with Pyongyang.
“Last year’s 20% return against a backdrop of little volatility was an anomaly,” says Joe Quinlan, chief market strategist at U.S. Trust in New York. “We’re not in the Land of Oz anymore.”
Now, it’s more like Kansas out there. Since the market’s 10% drop in Febru- ary, the first such dip in two years, the broad Standard & Poor’s 500 index has essentially gone flat — down 1.4% in a year that so far has been characterized by sideways trading and stagnant prices. It is 8.3% below its January alltime high.
The pause in the rally comes as in- vestors question if all the upbeat news on the economy is already reflected in current prices. And with rising interest rates taking hold, threatening to erode corporate profits and make bonds a more alluring investment than stocks,
they’re wondering: Is this as high as the market goes?
In a sign that good news is not juicing stock prices as hoped, the S&P 500 has declined 1.1% since the start of a stellar earnings season April 13.
It’s as if investors are ignoring the usual stock boosters. To start with, estimated profit growth for the
500 companies in the large-stock index is more than
25%, the best pace since 2010, according to Thomson Reuters. Add to that bright spot another impressive figure that’s doing nothing for the market: Nearly 80% of companies have topped Wall Street’s profit forecasts so far, according to Thomson Reuters. That puts the S&P 500 on track for its highest “beat” rate since the earnings tracker began reporting that statistic in 1994.
Says Quinlan: “Robust earnings hasn’t been converted into market rocket fuel.”
Investors are struggling to find a new reason to be optimistic, thinking all the good news has been factored into stock prices, says Brad McMillan, chief investment officer at Commonwealth Financial Network. “I think we will see the market moving sideways for a while,” he says. “If very strong earnings growth can’t drive it higher right now, it is hard to see what will in the near term.”
There’s a tug of war between strong earnings reports from companies and strong resistance from rising borrowing costs and a potential trade war, says Nick Sargen, chief economist at Fort Washington in Cincinnati.
The latest fear on Wall Street is that news about the economy and earnings is as good as it’s going to get. That is causing investors to rethink whether they want to pay higher prices for stocks when the pace of profit growth is likely to slow. That’s “what is holding stocks back now,” says Katie Nixon, chief investment officer at Northern Trust Wealth Management in Chicago. So what does this all mean for retirement savers?
“401(k) investors should certainly lower their expectations,” Sargen says.
But that doesn’t mean they should flee the market altogether. Many Wall Street pros believe the pause is temporary and stocks will rise later in the year as stillstrong earnings start to overshadow worries.
Here’s what investors can do to increase their retirement savings in a listless market:
❚ Check in on your portfolio: “At this juncture, the most important action for 401(k) investors is to do a portfolio check,” says Erik Davidson, chief investment officer at Wells Fargo Private Bank in Chicago. “Has your stock portfolio exposure climbed too high? Do you have enough bonds? How about real estate investment trusts, or REITs, and commodities?”
While stocks likely won’t match last year’s pace of returns, Kate Warne, investment strategist at St. Louis-based Edward Jones, expects stocks to rise modestly in 2018. And with interest rates rising, she sees an opportunity for investors to buy bonds that are paying out more in income.
“Since slightly higher interest rates make shortterm fixed-income investments more attractive, adding them can help investors rebalance to an appropriate mix of stocks and bonds for their situation,” Warne says.
❚ Benefit from dividend-paying stocks: If stock prices don’t budge, investors can still earn money from stocks that pay dividends, Quinlan says. The dividend yield on the S&P 500 stock index is 2%, which is better than no return at all. And S&P 500 companies continue to boost their dividend payouts. The average dividend increase in the first quarter was nearly 14%, according to S&P Dow Jones Indices
“Dividend-paying stocks are the best way to generate returns in a sideways market,” Quinlan says.
❚ Don’t try to time the market: Jumping in and out of the market is a difficult strategy to execute well. Staying the course is a better plan, says Alan Skrainka, chief investment officer at Cornerstone Wealth Management in Des Peres, Mo.
“Historically, 20% of the gains in a bull market take place in the last year, so it’s a mistake trying to guess when that ‘last year’ is,” says Skrainka, adding that “401(k) investors should maintain focus on their long-term goal — retirement — and not try to outguess the stock market.”