How we got here
What a difference a year makes.
Christmas Eve 2018, a day that in hindsight marked the bottom of what was a 20% drop over less than a three month period in the S&P 500. In fact, the index fell 2.71% that day, in what we dubbed the “Christmas Eve Massacre.”
In addition to the four one-quarter point increases in the Fed Funds Rate, we believe the primary catalyst for this decline was the tenor of the message that then newly-appointed Fed Chair was relating to the financial markets. In fact, five days prior to Christmas Eve 2018 the Fed hiked interest rates for what has turned out to be, thus far, the last time and accompanied this with the following statement. “The committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term.”
The implication is that interest rates would continue to rise. The consensus was for two increases in 2019.
Shortly after this statement from the Fed, contained within our weekly column that appeared in The Record as well as Saratogian,
Sunday December 23, 2018 we noted that we believed that despite this somewhat hawkish tone from Chair Powell that “the Fed will remain dovish for a longer period of time than investors anticipate,” certainly implying that this would be bullish for equities. This turned out to be fairly accurate as during the first quarter of 2019, the Fed ended their hawkish rhetoric and began to suggest that there would be no rate hikes for the balance of the year.
This change in tune from the fed has helped increase investor appetite for risk, thus pushing stocks to their current record level.
As we approach the end of what will most likely end up as one in which the S&P 500, including dividends rose more than 25% it is important to not get too giddy, to remember that investing is a marathon and not a sprint. We also liken it to a good marriage – you go into it knowing that there will be ups and downs, there will be minor spats as well as knock-down drag-outs. However, you also know that over the long-term there is nothing better.
With investing, you know there have been countless minor corrections as well as bear markets. Rest assured, the future will hold more of both. It is for these reasons that successful investors recognize the following.
The stock market historically corrects by at least ten percent on average once every year or so. We would expect next year, a Presidential Election year to be volatile. We will keep a close eye on which candidate emerges from the Democratic side.
We believe if it is either Elizabeth Warren or Bernie Sanders, it will prove problematic for the equity markets. The market will most likely take anybody else in stride.
Corrections and bear markets are part of the process. Even including the bear market of 2008, the S&P 500 has averaged nearly nine percent annually over the last fifteen years. You would be wise to not lose sight of this.
The VAST majority of bear markets are not as calamitous as was the one in 2008. Don’t let the ghost of bear markets past have too much influence on your asset allocation in the future.
After this year we believe it is time to certainly count your blessings, but also reset your expectations for 2020. When stocks decline as we are certain they will sometime in 2020, remember that this is part of the process. It is the reason that stocks historically outperform other asset classes over a full economic cycle. We expect this time to be no different.
In closing we wish to extend our sincerest warm wishes to all for a very Happy Holiday Season!
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call (518) 2791044.