A Year to Forget
Stock markets sank in the last quarter of 2018 with the S&P 500 and NASDAQ indexes entering “bear market” territory, defined as a decline of at least 20% from the most recent peak. While the Dow narrowly avoided the bear, most foreign markets fell even further, making this all but the official end of the nearly 10-year-old bull market. The 4th quarter declines dragged all U.S. indexes into the red for the worst annual losses since 2008. All in all, 2018 could hardly have been more different than 2017, a year that saw stocks rise relentlessly to new records.
With GDP growth near the fastest of this expansion, the reversal in markets stands in stark contrast to the performance of the U.S. economy. Unemployment is at records lows, job creation remains strong and consumer confidence, though dinged by the recent market plunge, remains high. Despite all of this, sentiment in the investment and business communities has turned dramatically for the worse. Analysts point to multiple causes for worry, including the President’s trade fights, a slowing Chinese economy, and the real possibility of a no deal Brexit. But each of those risks were present last year and referenced in this space at least once.
One major difference between this year and last is politics. Throughout 2017 the market essentially tracked Republicans’ progress toward passing corporate tax cuts. With those now realized, the view from Washington is less attractive. The government is shut down, Republicans are sharing power with Democrats, the administration is increasingly losing its “grownups” (Mattis, Kelly, Haley), and the President’s focus has turned from market-friendly policies to trade conflicts and border walls. In that light, it’s not irrational to conclude that all of the juice this Presidency can offer the economy has been squeezed.
Sentiment has turned so negative that in a recent poll of chief financial officers half of them expected a recession to hit the economy this year. That would represent quite a turnabout for an economy that’s currently growing at 3% and producing a couple hundred thousand jobs each month. None of the fundamentals that typically precipitate recessions, including high inflation and interest rates and overstretched consumers, are at worrying levels. That leads some to wonder whether pessimism itself can become a self-fulfilling prophecy. While we acknowledge that’s possible – business investment has already slowed markedly even as consumers continue to spend – we know of no historical precedent for this.
For long-term investors, though, this is mostly academic. Recessions are a fact of life, but a consistent ability to profit from timing them has proved elusive to even the most sophisticated market participants. The better question: is now a good time now to be invested in stocks? If you were invested at the beginning of last year, then it makes sense to remain invested now that stocks are more affordable. In fact, the world’s best investors all follow one tried and true approach –buy relatively more stocks when they are cheap and relatively less when they are expensive. That’s easy advice to follow for those with the courage to ignore charging bulls and prowling bears.