Economies fluctuate. They always have. They probably always will. These cycles are imperfect and a little chaotic. That’s what makes them so difficult to predict.
Most people would say we are currently in a bull market and we have been in it since March of 2009. That makes it over 10 years old and the longest bull market ever.
Bull markets don’t die of old age. However, some of the current data is positive, and some is negative. That means a recession in the next twelve months is unlikely, but we should expect a rough road ahead.
What should we be doing ten years into an economic expansion? We should get our finances in order. That means more than just our investment portfolios. We should take a good look at all of our savings and spending as well.
“The stock market is a device for transferring money from the impatient to the patient.”
This statement by Warren Buffett is educational and relevant today. When markets move downward, investors become uncomfortable. But during recessionary times, investors may panic. Companies pull back, people lose jobs, and stock declines can become sharp.
The U.S. is now late in that cycle, meaning we are coming closer to the end of a growth period. But if we look at the big picture, how damaging are recessions? How often do they occur? And how should investors handle them?
Since 1950, the average expansion lasted 67 months (5.6 years) and had an average GDP growth of 24 percent. The current expansionary period is one of the longest in history, currently 10 years in length. But it has also had one of the slowest average growth rates and is still far from the largest in total growth. Capital Group believes this has prevented the major imbalances that cause recessions from materializing. However, they do admit that the risk of recession will continue to grow until its inevitable arrival.
The average recession has lasted only 11 months and had a GDP decline of 1.8 percent. The contrast, as you can see in the graph provided, is immense. Yet the fear that those relatively small declines bring is often greater than their positive counterpart. The truth is, opportunities are developing in declining markets, and the strongest rallies are generally found right after a recession.
The general rule is this: Stay invested. Those who deviate from their financial plans are those who Warren Buffett calls “impatient investors.” If you stick with your plan, the odds of success will greatly be in your favor and the money transferring from the impatient will be to you, the patient investor.
Presented by Max McQuiston (American Funds) at the Just for Women conference. Recap by Jordan R. Hadfield.
Ten years ago, the stock market and the economy were in disarray. These were dark financial days for most investors and most Americans.
By March 1, 2009, the Dow Jones index had fallen over 50 percent from its high (from over 14,000 to nearly 6,500). One advisor asked me what would happen if it dropped another 50 percent. His faith in a turnaround was being tested. It turned out that the Dow did continue to slide lower, but for just one more week and the loss was not another 50 percent, but only 3 percent.
A client called to close her account. She was fortunate because she had invested conservatively and had actually made money since the crisis began. She didn’t care. She was petrified–wanted zero risk. She sold out. That was March 2, 2009. Exactly 7 days later, the market hit bottom.
The client and advisor missed out. The S&P 500 has increased 305 percent since its low in 2009, and that doesn’t even include dividends. As we have stated many times,
“If you want to see the sunshine, you have to weather the storm.”
December 2018 provided the same lesson with less drama. This time, investors really seemed to be acting irrationally. The market fell around 19 percent in a very short amount of time. Sentiment surveys at CNN Money and the American Association of Individual Investors were recording record lows.
However, our indicators at SFS were not flashing a crimson red. In December 2018, those that focus on employment and consumers (70 percent of the economy) looked strong. Low energy prices also seemed good.
What about the sentiment indicators? Using the emotions of investors as a signal is not very reliable. These emotions can change quickly, so they cannot signal what is likely to happen in the coming year or years. They are also a better indicator of what not to do, which means we had another reason to be optimistic.
In short, we absolutely believed the market would reverse course and move higher. For all our investors that weathered the storm, the sun did shine again and brightly.
Where do we go from here? I said last December that things were not as bad as they seemed. Now I am telling investors that things are not as good as they may look.
With evidence of slow growth, the Federal Reserve will stop tapping the breaks on the economy. Plus, there is plenty of cash that left the stock market in the fourth quarter that has not returned to the markets, yet. Both are reasons to not give up hope for a positive 2019.
The S&P 500 is often used to represent the U.S. stock market. One cannot invest directly in an index. Past performance does not guarantee future results.
If you have an Employee Stock Purchase Plan (ESPP), you might wonder if it is a good value. An ESPP can be very beneficial, depending on how the plan is written. Check the plan rules to see if it lines up in your favor. If so, then you should (1) participate as much as you comfortably can and (2) cash out each year as soon as you can. Here’s why an ESPP is usually a good deal.
An ESPP allows you to contribute a percentage of your income each paycheck towards the purchase of company stock. The payroll deductions go into an account and are held until the end of the purchase period, typically yearly. At that point, you “purchase” company stock usually at a 15% discount, which is a nice benefit by itself.
If your plan has a “look back” provision, it is a bonus. A “look back” provision gives you the price on either the offering date or the purchase date, whichever is lower. So, even if the company stock is down from the offering price, you still get it at a 15% discount from its lowest price. If the stock is up, you purchase at the lower price and may have significant gains.
These potential gains may make the transaction attractive, but you shouldn’t sink all your money into the ESPP. Participate at a rate that is comfortable and that doesn’t rob your other buckets.
You should always have short-term, intermediate-term, and long-term buckets. Your short-term bucket should be your emergency fund, preferably in a Money Market or short-term CD (i.e. 1 year or less). We like to see an emergency fund of 3-6 months of living expenses.
Your 401(k) and other retirement savings are your long-term bucket. We prefer that clients save 10-15% per year for retirement. If you already have 1-2 months of living expenses in the bank and you are saving for retirement, you could use the ESPP to build the emergency fund and then to build the intermediate bucket for expenses like new cars, buying a home, etc. Once your short-term bucket is full, then participate more fully in the ESPP.
Cashing out immediately when the stock is available is the safest choice because you lock in guaranteed gains. Just be aware that the distribution will be taxable as ordinary income, unless your plan is qualified, which may have a more favorable tax treatment.
You can choose to hold the stock to lower your taxes. However, you must keep it for one year from the purchase date, and two years after the beginning of the offering period. At that point, the gain above the purchase price will be taxed at a long-term capital gain rate, which is always lower than your ordinary income rate. However, it may not be wise to wait a year. Saving taxes doesn’t help if the stock value goes down by more than your tax savings. That is why the safest bet is to sell the stock as soon as it is available. Only hold on to the stock if your other buckets are filled and you are just investing for the future.
ESPP’s can be a great way to save for the future. If you have any questions about your specific situation, please contact one of our wealth managers.
This article is not a solicitation, offer, or recommendation to buy or sell any security. Financial advisory services are only provided to investors who become Smedley Financial clients. Projected returns are not a guarantee of actual performance. There is a potential for loss as well as gain that is not reflected in the information presented. Past performance is no guarantee of future results. This article is not intended as tax advice, and Smedley Financial does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Smedley Financial assumes no responsibility for the tax consequences to any investor of any transaction.
My daily commute often leaves me sitting in traffic on State Street in Salt Lake City. Sometimes it can take 10 minutes to move 3 blocks. During these seemingly hopeless times, I often see a cyclist pass me. I consider the wisdom of selling my car and riding my bike. However, no matter how bad the traffic, I eventually pass the biker–no exception. (As a biking enthusiast, I regularly commute on a bike, but it is not faster.)
As investors, we faced similar thoughts in 2018. Should we make a short-term decision even though we know which vehicle will get us where we want to go quicker?
Investors entered 2018 with a Fear Of Missing Out (FOMO). The stock market had just completed a year where every month was positive. A tax cut had just been passed to stimulate greater consumer and corporate spending. Around the world, growth seemed synchronized, and expectations were rising.
Here is a review of my three predictions for 2018 with commentary on how things turned out.
U.S. growth exceeds 3 percent. The impact of the tax cut, which I referred to as a “sugar rush,” temporarily lifted U.S. growth to make the first forecast correct. The benefits of the cut were so short-lived that investor excitement quickly turned to concern.
The Federal Reserve finally has an impact. Interest rate increases by the Federal Reserve in recent years had largely been ignored by the stock market. This prediction also came true, especially in December when a rate increase was done despite all the problems going on in financial markets.
Investors would be disappointed with the market, but positive economic growth would help the market end the year positive. This prediction seemed to be correct for much of the year. However, it failed in the part that mattered most.
The stock market ended 2018 in an absolute panic! Oil prices were plummeting. The White House could not get a deal done on trade with China. The federal government had its third shutdown in just one year. And, despite all this, the Federal Reserve raised interest rates stating that nothing had changed; the economy was strong.
The stock market sell-off intensified, and the bull market arguably came to an end on Christmas Eve. December performance of the S&P 500 stocks was the worst since 1931. Historically, that makes some sense. The Great Depression began in 1929.
But we were not in the midst of a depression — quite the opposite. Corporate earnings were at record levels. The real GDP growth in this country was around 3 percent. Consumer spending, which represents 70 percent of the U.S. economy, rose in December by 4.5 percent!
What is an investor to do when the economic data is positive, and the market is so negative? At times like this, it is critically important to stay focused on your long-term goals.
It is our job at SFS to help you develop these goals and keep you on track to achieve them. We have tools to provide the necessary clarity and strategies to implement to help you keep moving forward.
The Dow is down 600 points! The S&P falls 7 percent! Five straight days of market decline! Sell! Sell! Sell!
During times of volatility, we see headlines like this on the news, read them on the Internet, and hear them on the radio. But before we buy the fear and sell the stock, let’s take a step back.
The most obvious fact about the stock market is this: Buy low and sell high. This gem of information is simple to understand and promises positive returns. Yet, it is during tough times that investors often forget what they know is best. Instead of buying low and selling high, investors often buy fear and sell stock.
A focus on negative market movement can cause worry, even panic. This leads investors to act irrationally and break the second rule of investing, which is: Don’t let emotion overpower logic.
Times of smooth appreciation are the exception and not the rule. In fact, 2017 was the first year in history that the S&P index closed higher every month. Volatility is the norm. Sometimes markets are up. Sometimes they’re down. Historically, the long-term trend, is up.
The average annualized return on the S&P 500 since its beginning in 1928 is approximately 10 percent. This means that those who stayed invested in diversified portfolios long-term made money.
Despite all the positive statistics I could type, watching your investment accounts decline is scary. Maybe the key to investment comfort (and success) is not a change in investments, but a change in paradigm.
My advice is this: Hire a qualified financial advisor whom you trust. Then shift your focus from market performance (something you can’t control) to your financial goals (something you can control).
When we create a plan for a client, we base it on their goals. Goal-based investing puts the emphasis on the objective, not the performance. This offers advantages.
First, it gives us a target. When we know what we’re aiming for, it becomes much easier to determine the probability of success. Changes we need to make to improve the likelihood of success also come into focus.
Second, it can produce higher returns. Focusing on the goals rather than the short-term performance can reduce emotional overreactions to market volatility. It also decreases the temptation to chase high returns, which often leads to poor performance.
Third, it brings stability and creates confidence in your financial future. Knowing you’re on track to meet your goals brings comfort regardless of which direction the market is moving.
I believe goal-based investing is a favorable approach to planning for your future. It will also consider your current financial situation, risk tolerance, and time horizon. Make sure to meet with your financial advisor regularly to review your goals and update your financial plan.
Before you buy the fear and sell the stock, please call us. We would love to talk more about goal-based investing and how it can benefit you.
*Data from public sources. Investing involves risk, including potential loss of principal. The S&P 500 index is widely considered to represent the overall U.S. stock market. One cannot invest directly in an index. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author.
Is this as good as the U.S. economy is going to get? This is the question investors have been asking as storm clouds have settled over the stock market. During all this commotion, a silver lining can be seen with a strategy that may be helpful.
The paradigm shift for stocks, which began in October, is reminiscent of a change in early 2000 when a positive run for technology stocks abruptly ended. Unnoticed by some in 2000, the economy was still growing and a rotation of leadership in the stock market presented investors with new opportunities. This is where diversification can help.
Take a look at the graphic below. Diversification lost when the market lost and made less when the market gained. Despite these disappointing facts, the diversified portfolio would have made more money!
Why does diversification make a difference?
Limiting your losses helps.
No one knows when the market will rise or fall, so any strategy attempting to capture the up and avoid the down is unlikely to do well.
While there is no way to accurately predict the future of any one company, the market tends to rise over long periods of time – making losses temporary for those who stay diversified and invested.
As the storms arise, think of diversification as your umbrella. You may still get a little wet, but it will help. Your long-term perspective and optimism will help you hang on until the sun shines – and it will shine again.
The new year will continue to bring many opportunities for investors, especially with positive economic growth. There are no guarantees, but the current forecast calls for a 2.5 percent increase.
*Diversification History data provided by Blackrock. Diversified portfolio consists of 60 percent stocks and 40 percent bonds. The S&P 500 is often used to represent the U.S. stock market. One cannot invest directly in an index. Past performance does not guarantee future results.
2018 has been a year of market volatility, and that can be scary at times. When market volatility hits, here are three things that can help you stay calm.
1. Focus on the Long-Term
When we create financial plans, we focus on your long-term goals. When market volatility strikes, think to yourself, “Have my goals changed? Do I want anything different out of my investments than I wanted before?” If your long-term goals haven’t changed, then you are still okay. If your long-term goals have changed, talk to your financial advisor and see what the best course of action is.
Before you make any knee-jerk reactions to market volatility, focus on the long-term. We don’t want to sell out, lock in losses, and not have the opportunity to benefit from the market growth that will come later.
2. Trust Diversification
Investing in a diversified portfolio is even more critical when market volatility is high. We keep our portfolios diversified to help lessen the effects of market volatility. The basic idea of diversification is to spread your investments across many different areas of the market in order to reduce the risk. It usually works when things get rough because you don’t have all of your money in the part of the market that is losing the most.
With your diversified investments, you are likely to still lose in a down market, but you should lose a little less. Most of the time, a diversified portfolio will come out ahead of a non-diversified portfolio after enduring the ups and downs of a market cycle. Remember, diversification works!
3. Volatility = Opportunity
You’ve probably heard this saying your whole life: “Buy low, sell high.” That is the right mindset to have when it comes to investing, and we all know it. However, as humans, our emotions get in the way, and we convince ourselves to do the exact opposite.
Why would we ever be tempted to buy high and sell low? It is common to feel comfortable investing into something that has been going up because we assume it will continue. Again, we believe the trend will continue when the market is falling and is at a low point. As an investor, it is helpful to remember that changing our strategy based on how we feel can often be counter-productive.
Market volatility can create major opportunities to buy in at lower points. Try looking at it this way: if you find a nice coat, you’d be more likely to buy it at 10% off, right? It’s the same way with investing. We want to buy at a “discount” to maximize the value we can get out of an investment. It can be hard to remember this in volatile times, which is why it is essential to have a professional who is experienced and educated in your corner to help you make sound investment
Despite record U.S. oil production, the price of a barrel has been climbing in 2018. The ripple effects can and will be seen throughout the economy in the coming months.
The average price of regular gasoline in the United States is nearly $3.00 per gallon. One year ago, it was $2.35.1 That’s a 25 percent increase at a time when few expected such a rise.
Most Americans spend between 2 and 4 percent of their income on gasoline,2 so the direct impact on our spending may not seem like a big deal at first.
Americans, accustomed to the lower prices over the last couple years, have also been buying larger and larger cars.
We should also remember that oil is a major ingredient in many products we purchase (as illustrated in the adjacent graphic). While U.S. supply is growing, it has fallen globally.
Oil prices are still far from their all-time high of $136.31 in June of 2008. The domino effect of rising prices has also not been a major concern yet.
Global oil supply is the wildcard. If it increases (a real possibility), prices are unlikely to rise significantly. If it falls, rising prices may spread. Eventually, it could impact our spending.
Remember, consumers, drive 70 percent of the economy. So, if we cut back in our spending then the U.S. economic engine may slow as well. That’s why we are watching oil more closely in 2018.
(2) U.S. Energy Information Administration
*Research by SFS. Graphic from Visual Capitalist. Investing involves risk, including potential loss of principal. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based upon
changing conditions. This is not a recommendation to purchase any type of investment.
If you could go back in time 100 years and pick an asset in which to invest, which would you choose? Knowing of events like the Wall Street Crash of 1929 and the Great Depression, 7% inflation in the 1970’s, and the stock market crash of 2008, would you still choose to put your money in stocks? If so, you would be making a wise decision.
I recently came across an article posted in the March 2018 issue of The Wall Street Journal regarding the average annual returns of 10 popular investments over the last century. (I included a graph showing these investments and their average historical returns above inflation.)
At first glance, I noticed the negative returns of diamonds. Although diamonds are quite popular, especially on the finger of a loved one, they have been a poor investment if appreciation is the goal.
Bonds, which happen to be fifth on the list behind collectable stamps and high-end violins, show an average annual return of 2%.
Gold, a popular investment among some investors, has historically fallen short when compared to fine art and fine wine; the latter of which post returns over 500% more than that of gold.
Stocks have had the highest returns, and by a large margin. Despite the crashes, recessions, and economic contractions, stocks have had the best return in the last 117 years.
As we face volatility in the markets in 2018, we know that a diversified portfolio of stocks and bonds has weathered the storms of years past.
Despite the risks of recession and downturn in the future, I plan to keep my diamonds on my wife’s finger and my long-term investments in stocks.