Submitted by Brian Frederick, CFP®, CIMA®
With the recent market moves down finally giving us the correction that has been long in coming, we are starting to remember the pain from the Financial Crisis or the Great Recession. Even hearing those terms ups the anxiety level of most investors. What to do or not do? Only time will tell for sure, but here is my perspective on what we are seeing.
It has been nearly two years since the last correction in the S&P 500, and 2017 was notable for several reasons. Not just a nice, double digit return in the market, but how it achieved those returns. Several things happened last year that spoke to what a nice ride it was:
- The stock market never dipped below where it started the year out, the first time that had ever happened;
- The stock market went up every month and that was the first calendar year that had ever happened;
- We only had three days where the market moved more than 1%, and two of those were up days.
A very nice year in the stock market indeed. While I don’t think this correction is a surprise to most people, it definitely is not fun to experience. It is much more exciting to watch our accounts gain in value than go the other way. A correction is when the market goes down by 10% and they are normal, expected, and healthy. What to do now?
Selling in a panic or fear is not the road to riches and that is not what is going on here. There is some normal profit taking that was caused by a few concerns in the news that I will briefly outline:
- In January’s jobs report, it was announced that there was a big gain in the wage growth number from 2.3% to 2.9%. Several months ago, I saw articles asking where the wage growth was. Did it just appear? No, 18 States and 20 cities had legislated minimum wage increases. Why does this matter? Because it is proxy for when inflation starts to rear its ugly head and cause problems for the economy. Traditionally, recessions have occurred when that number gets closer to 4%. This is one of our “trigger points” and something we are watching.
- Another area of concern pointed out in the news has been interest rates moving up. This has been another one of our “trigger points” and something to be watching. We believe interest rates are trending up, but not going to explode higher. With all the cash out on the sidelines, it will eventually get put to work and find a home. This is supply and demand, and should help keep interest rates in check as people tire of earning pennies in their bank accounts and start to invest in bonds and other investments that can pay more.
- Another concern is the effects of the recent tax cut on the deficit down the road. That is a great political discussion, but something the stock market doesn’t typically worry about in the short term.
- A new Federal Reserve Chairman started this month and he has experience with the Federal Reserve but is a new leader. Not a major concern, but still something to watch until we are familiar.
Overall, these are all valid concerns, but do they overpower all the positive things being generated in this economy? Probably not, but they do give people a good reason to pause and take some money off the table to lock in profits before reinvesting elsewhere.
In times like these, when changes can happen so fast, you want to make sure that your investments are driven by a solid process and not emotions, while being a part of your overall financial plan. This just reinforces the importance of working with a trusted professional who is fully aware of your particular financial situation and the opportunities and concerns you are facing.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. Any opinions are those of Brian Frederick and not necessarily those of RJFS or Raymond James. Past performance may not be indicative of future results. Investing involves risk and investors may incur a profit or a loss. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.