Eventually stock markets have to go down...
Here are the facts as we know them as of August 6, 2019...
After the biggest one-day drop of 2019 AND the worst week of 2019...the S&P 500 is up 14.51% for the year1
After the biggest one-day drop of 2019 AND the worst week of 2019...the Dow Jones is up 10.71% for the year2
After the biggest one-day drop of 2019 AND the worst week of 2019...the International Equity Index is up 8.57% for the year3
With interest rates a a near historic low...the U.S. Bond Index is up 7.35% for the year4
If you’re reading this, you are probably like most “normal” investors and have a portion of your portfolio in bonds/cash. It is for days JUST LIKE yesterday, and weeks JUST LIKE last week, and quite simply for basic “sleep insurance” that we’re willing to forgo the longer-term upside of the stock market for the relatively benign and uneventful returns that the bond world affords us.
If you’re reading this and you don’t have any of your portfolio in bonds, it’s most likely due to the fact that you’re early in the investment curve and are likely investing a good amount of money in a disciplined manner (dollar cost averaging). In that case, these downturns in the market should be cheered, not feared. Easy to say, hard to do.
There is real tension and trade war pressure between the U.S. and China. However, yesterday’s market decline was NOT about additional tariffs, or devaluation of currency, or ceasing of U.S. Crop purchases. True, that is what “caused” the heavy downside trading (not investing) yesterday, but we believe the root of the volatility was that the U.S. had decidedly changed its trade policy in that we are no longer willing to subsidize China by turning a blind eye to the country’s piracy of intellectual property. This will NOT get resolved overnight or before the September 1st tariff deadline. This will take months and/or years to resolve, just as it’s taken years/decades to manifest itself. The real question is, how will the domestic and likewise the international growth be affected by this? Currently, U.S. growth has been solid, with China’s strong growth slowing. It remains to be seen how a prolonged Trade War affects both growth prospects, but rest assured there will be daily headlines of sensational proportion. We need to keep our eyes on our desired long-term outcome and look past the media hyperbole.
Stock markets HAVE TO GO DOWN. Yes, I said it, and I'll say it again...stock markets have to go down. The only way the equity markets have and will continue to deliver out-sized returns relative to other asset classes is because they can, and do, go down as well as up. Without the fear (and reality) of loss, there is no reality of excess gain. There will be a “new normal” established as the fear of loss is gone, and all potential upside is then eliminated. Fortunately (yes fortunately) for us, both the risk as well as the reality of loss appear from time to time. Although uncomfortable and maddening, this allows us to experience the longer-term joy and reality of excess gain.
Cash reserves may seem detrimental during rising markets, but can and do allow a “sense of calm” in more volatile markets. Let’s face it, the press wants every person to live and die by the next news story, headline, or tweet. However, most savvy investors have the beautiful aplomb to drown out this noise. Long-term investments rise and fall continuously (as they should), which allows out-sized long-term results. Cash reserves allow short-term needs to be met without drawing from long-term investments in an untimely manner.
If/when the headlines or the water-cooler talk (does this ever really happen anymore) gets the best of you, give us a call or shoot us an email. We’ll review your families’ overall Dashboard, look at exactly how your portfolio is positioned, and make any necessary changes/updates as needed. If nothing else, we’ll ensure our strategy and goals are totally identified and in-line.
Although it’s not nearly as sensational, and often hard to do, we will continue to “FIGHT THE NARRATIVE” on our way to real wealth and achievement of our long-term goals.
1: S&P 500 Returns represented by SPX. Source: Bloomberg
2: Dow Jones (DJIA) Returns represented by INDU. Source: Bloomberg
3: International Equity Index (EAFE) represented by IEFA. Source: Bloomberg
4: U.S. Bond Index represented by AGG. Source: Bloomberg
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members. Artwork by Carl Richards.