Do you know that feeling when you've been going non-stop with one stressful thing leading to the next with no vacation in sight? You have given everything you have for weeks! Then you start to feel signs on a cold coming on. Before you know it your body physically hits a wall. We all have gone through that cycle before and that's exactly what is happening to the global markets.
The US stock market (S&P 500 index) has been charging higher since 2009 with the help of low interest rates implemented by the Federal Reserve.
Then in August of 2015 we got a cold drip of news from China. The 2nd largest economy in the world behind the United States reported signs of slowing. The US market shrugged that off and in December the Fed hiked rates by 0.25% for the first time in nearly a decade. The US economy can handle that, right? Not so fast. The New Year brought with it even lower oil prices and fears of a global slowdown were evident. Bang, the US market hit the wall. The good news is that this is a normal, reoccurring event for the markets and there are cures before falling into another recession.
Between 1950 and 2014, half of the annual periods saw a correction of 10% or more in the S&P500.
This year the market happened to hit the wall Dec 31st when the S&P 500 closed at 2,044. On Wednesday, January 20th, the index closed at 1,860 which is a -10.5% decline, the worst start to a year since 1929. Keep in mind that Wall Street considers it a bear market when an index falls 20%.
Despite all of the concerns and global volatility in the markets, the US economy is still slowly chugging along in positive territory. The US has consistently been producing 150,000+ jobs each month, albeit at a low overall participation rate. Despite the media's efforts to report 5% unemployment rate, the real news is that only 62% of adults in America are working or looking for jobs. Let's just say we have plenty of room to grow.
The US economy's growth rate is calculated each quarter using a combination of consumer spending, government spending, and the difference between what is imported and exported. The numbers are calculated into a growth rate called the Gross Domestic Product (GDP) and during the 3rd Quarter of 2015, the US economy was growing at a 2% rate. Low, but not negative. The consumer spending portion is said to make up roughly 70% of GDP. However, the GDP figures can not be totally relied on. The personal consumption expenditures section of consumer spending is made up of trillions of dollars in healthcare spending, the majority of which is funded by the government/medicare. Also, consumers spend on products produced outside of the US so it is important to note that spending is not a measure of production. Never the less, its been the rule of thumb used since 1944.
The economy is considered in a recession when the GDP is negative for 2 consecutive quarters. In 2008-2009 the GDP growth rate tanked along with the S&P 500 which declined by over 50% during that period.
What does all this mean for you and your retirement portfolio?
Let's now take a look at your personal financial charts and check the health of your investment strategy. Are you appropriately diversified? If so, you should not have lost any sleep over your investments these past 3 weeks. If you plan to work 10 or more years before retiring, and expect long-term growth, your account value has undoubtedly taken a hit in 2016. That is just part of the risks of investing which has historically proven to reward long-term investors. Remember, a market timing strategy has never proven successful over long periods of time.
However, if you are concerned that you may need to spend some of your money within the next 5 years, your investments should be weighted more towards cash or a bond index fund - a diversified mix of high quality government and corporate bonds.
Also consider adding to your nest egg when the market corrects. It's just like giving your body a good night's rest or a boost of vitamin C when you're sick. When fear and panic set in among investors, and it looks like the markets are in free fall, that should be a trigger to add to your account. Making contributions towards your tax-deferred retirement and brokerage accounts in the dips in the market will prove to be a profitable strategy over time.
To summarize, you shouldn't panic, loose sleep, or succumb to emotional reactions during these periods of increased market volatility. In fact, if there was no volatility in the market, there would be no opportunity. My job is to personably work with you to understand your objectives, implement an appropriate strategy, and make sure you understand the strategy so you don't hit the panic button and sell at the worst possible time.
Those cures I mentioned? This week we get 4th quarter earnings reports from the heart of US corporations. This is when wall street will reevaluate stocks and if corporate earnings are higher than expectations, don't be surprised to see institutions stepping back in to buy at these low levels. Corporations tend to announce buy backs of their own shares during these reports as well. Lastly, I believe low oil prices will eventually prove beneficial for the US consumer. I remain positive on US equities and US corporate bonds.
I hope you enjoyed this issue of the CIM newsletter. If you got value from this newsletter, please share with friends and family. As always, feel free to contact me with any questions and topics of interest. Thank you.
Justin Burgess Investment Advisor
Copley Investment Management
5025 B Wrightsville Ave
Wilmington, NC 28409
CIM's goal is to provide quality financial advice at an economical cost. Whether investing for retirement or the next generation, you can rest assured that we are paying attention. Our professional credentials, independence, experience, integrity, and transparent business model qualify us to accomplish this goal.