April 11, 2018 Letter to Clients
On my way into the office this morning I hit a pothole, which I’m convinced was not there yesterday. A mix of traffic, shifting temperatures and water ultimately created the new bump in the road, but the pothole will undoubtedly be repaired. Contractors will tell you that prevention is always preferable to after-the-fact and quick road repair, but it’s not guaranteed that you’ll never have to deal with potholes or cracked concrete again. Potholes, like dips in the market, are both inevitable and ultimately a nuisance; however, they do not deter us from changing our route or reaching our destination despite the rough road we’ve seen in the markets this year.
Things to Consider
It’s been an eventful start to 2018 with January’s burst of equity-market euphoria given way to a swift change of market character and market volatility. In 2017, volatility was remarkably low with the market closing up or down by 1% or more only 8 times. But, last year was the exception and this year is closer to the norm. Last year’s spectacular performance was certainly a nice problem to have for the average portfolio, but as we entered 2018 valuations were quite elevated and ripe for something to undermine the high. With both the recent correction in prices and the strength in earnings, valuations have retreated somewhat presenting additional buying opportunities across the markets.
As I’ve stated in previous letters, we expected one or more market corrections in 2018 as this is normal and often healthy for the markets. In short, corrections are defined as a decline or downward movement of the markets of at least 10 percent and a true correction exceeds that amount. As history has shown, market corrections are a natural part of the investing cycle. There have been 76 corrections of 5 to 10 percent, 26 pullbacks of 10 to 20 percent, eight drops of 20 to 40 percent and three drawdowns greater than 40 percent since the end of World War II. We all remember the days of the 2008-2009 market decline, and we’ve seen how far the markets have since climbed. Put into perspective, the Dow Jones had 71 record high closes in 2017, the most in a single calendar year.
While the recent market drops may feel significant, emotional investing can often take over and it is important to remember that it is virtually impossible to time the top and just as difficult to discern the bottom. Since graduating from college this is the only profession and industry that I’ve worked in, and with almost 20 years’ experience I have worked in almost every market condition (good and bad). My experience has taught me and research has shown that clients have fared far better when they stayed invested than when they made knee-jerk reactions to market volatility. Even so, negative headlines and geopolitical noise can be hard to ignore and we are often more drawn to this type of news.
As psychologist Tom Stafford explains, “…sudden disaster is more compelling than slow improvements” and we often have a collective hunger to remember bad news. Major indexes like the Dow Jones, Nasdaq and S&P 500 are useful tools for tracking market trends, but they often are not reflective of the average client’s portfolio. While these indexes are the most highlighted in the news, there are hundreds more that represent the overall global markets.
My response to the recent events is to remain focused, stay the course and position portfolios to capture the next market upswing. Your financial plan is designed to reach your near-term and long-terms goals while staying true to your risk tolerance. We remain steadfast in our approach and continue to make calm, thoughtful decisions to help guide you through the ever-changing economic and financial landscapes.
The Bigger Picture for the Markets in 2018
While I expect more market volatility, I still see the potential for solid gains for stocks this year. Historically speaking, years with solid performance in January have typically seen full-year returns and I remain optimistic for this year as economic and market fundamentals continue to be strong.
Economic Growth – Despite market swings, we are in a period of synchronized global economic growth helped by a lagged effect of past monetary stimulus, fading financial regulation and a much larger than expected federal government fiscal stimulus package. In addition, the majority of Americans are just now incorporating the new tax cuts into their budgets, which should continue the tailwind for the U.S. economy.
Earnings – Corporate earnings continue to reflect broad-based growth as shown by fourth quarter S&P 500 reporting and are expected to continue throughout 2018 attributed in part to the impact of the corporate tax cuts. S&P 500 firms are projected to report double digit year-over-year earnings growth. And because stocks are trading at lower valuations, they may gain more if earnings turn out better than expected.
Trade Policy – The topic of trade has been shoved into the spotlight recently and that is unlikely to change anytime soon. As the U.S. tries to negotiate a number of existing trade agreements, it is important to keep in mind that the recent amount of stimulus going into the U.S. economy significantly outweighs the potential value of the announced tariffs. Also of note is that even though the markets have reacted negatively to recent trade spats, we have not seen a trade war in over 90 years for reasons including; increasing globalization, longer supply chains, and the World Trade Organization dispute resolution process.
With the current environment, we still expect market opportunities throughout 2018 and continue to make adjustments in our clients’ portfolios in preparation for and in response to market activity. Based on our research and as you have seen in our past market commentary, we have been very consistent with our insights and projections for the markets. We’ve seen markets such as this one before and I refer you back to our previous letters, which can be found on our website at www.lepagefinancial.com.
Your Financial Health
Investments are just one part of your overall financial plan and your financial health depends on other factors as well; including but not limited to your income and expenses. If you find that you are experiencing significant changes in your life, we encourage you to contact our office so that we may evaluate and discuss how these changes may impact your overall financial plan. I welcome the opportunity to answer any questions you may have and as always, thank you for your continued trust and confidence in our firm.
Sincerely,
Steven LePage
These are the opinions of Steven LePage and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Indices mentioned are unmanaged and cannot be invested into directly. All investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal.