With 2018 almost at a close, many investors are flat-out exhausted and frustrated with the results – or lack of results for that matter – delivered by the markets. And it’s easy to understand why as at this point in the year, many stock (equity) and bond (fixed income) indices are flat or negative. What’s more is that for the first time in many years, we’ve experienced multiple 10% corrections in the equity markets. On average, we tend to see just one of these 10% corrections per year, with the operative word being “average.”
There are many reasons for much of this volatility we’ve seen – the mid-term elections, the ongoing trade war with China, and perhaps most importantly, rising interest rates. As counterintuitive as it may seem, rising interest rates can negatively impact stock prices and bond prices at the same time. This is because when interest rates rise, bond prices fall. And stocks tend to fall when interest rates rise because investors seemingly have less incentive to take risk in stocks if other saving vehicles offer higher interest rates. The silver lining here is that rising rates typically means higher income generation within the fixed income portion of portfolios and higher yields on savings accounts.
So, what do we make of this volatile year and what can we do going forward? For one, we need to understand that most all markets tend to deliver negative returns on occasion. We would submit that these negative years are the price we pay for the positive years, which have historically occurred far more often than negative years do. Secondly, we need to be mindful of which markets we’re invested in and, consequently, exposed to. As an example, in most accounts, we’ve reduced the duration of our fixed income portfolios – favoring shorter-term bonds over longer-term bonds because quite frankly, we don’t see much value right now in long-term bonds. In line with our expectations, shorter-term bonds are slightly positive on the year, while longer-term bonds have lost nearly 6% this year. (Source: Morningsar Index Returns November 28, 2018).
With regard to stocks, we’ve tended to favor U.S. stocks over international companies, and as a result, we’ve largely been able to avoid the extended sell-off in international and emerging markets that has taken place this year. Looking ahead, we believe that quality international companies may now be more attractive given their recent declines.
We’ve also finally seen a pullback in technology stocks which we suspected might occur as noted in our July Wealth Briefing. And with many market indices like the S&P 500 being heavily weighted towards technology companies, we’re not surprised to see some of these recent declines in the market. It’s also important to note over the last few weeks – and as we suggested could occur, value-oriented companies have begun to outperform relative to growth-oriented companies (Source: Morningstar Index Returns November 28, 2018). We’ll be watching closely to see if this rotation towards value-oriented companies continues.
Lastly, in a year like this we are reminded that investing may seem simple, but it’s typically not easy.
The U.S. economy continues to appear very healthy with near full-employment, improving wage growth, tame inflation, and strong GDP figures. The Federal Reserve Chair, Jerome Powell, recently announced that interest rates are near “neutral” and this was encouraging news for the market. We’ll continue to keep an eye on the Fed’s interest rate policy as it could certainly impact portfolios. As for where the economy is headed – it’s hard to say. If we had to venture a guess, we would anticipate continued positive growth, albeit at a slightly lower rate than in the recent past. Experience tells us that trees don’t grow to the sky forever and that we will eventually see some hiccups ahead.
Each year, around this time, we consult with our team of CPAs and Estate Attorneys to learn what steps investors can take to best position themselves for success. Here are some thoughts for you to consider and as always, be sure to discuss with your tax professional before implementing.
- Consider any tax-loss harvesting opportunities within your portfolio
- Review your payroll withholding rates with your employer to limit the potential for surprises come tax time
- Review opportunities for charitable contributions as a way to give to causes you care about, while also potentially reducing your tax obligation. And if you’re over 70, ask about qualified charitable distributions.
- Determine how much you are eligible to contribute to retirement accounts, and if possible, maximize those contributions
- For business owners, review your retirement plan options and also consider pre-paying expenses for 2019
- Consider possibly converting part of your pre-tax accounts to a Roth IRA
As always, we are here for you to answer questions, review your portfolio and your important goals, and work consultatively with your other professionals.
Disclosure: The S&P 500 index is owned by the Standard & Poors company and cannot be invested in directly. The Nasdaq Composite Index is owned by Nasdaq and cannot be invested in directly. The Dow Jones Industrial Average is owned by Dow Jones (News Corp) and cannot be invested in directly. The opinions expressed above are those of Jeff DeLarme and are subject to change. Investing involves risk. Past Performance is no guarantee of future results. This wealth briefing has been written for educational purposes and is not a solicitation to invest or buy securities and does not constitute investment advice. Any data included or referenced has been sourced from what are believed to be reliable sources, but should not be relied upon.
The companies engaged in the technology industries are subject to fierce competition and their products and services may be subject to rapid obsolescence.
International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility.