Investors’ heads must be spinning after the fourth quarter sell-off driven not by fundamentals but primarily geo-political events such as government shut downs, potential firing of the Federal Reserve head, Brexit and tariffs, just to name a few. You’re most likely saying ‘so tell me what’s new’. It’s not new, it’s normal. We call it noise. As investors we need to pay attention to these occasional noises and evaluate how we’re invested. We hear advice to keep our thoughts on the long-term when markets decline but this is easier said than done. We referenced a table in last quarter’s commentary - “Market Downturns Happen Frequently and They Don’t Last Forever”. True to history the market bounced back as quickly as it sold off. Keep in mind the S & P 500 fell 13.6% overall in the fourth quarter and the bounce has erased most of its losses this year. The Federal Reserve’s decision to pause and not raise interest rates three times in 2019 as it stated in December 2018, along with Jerome Powell remaining as head of the Federal Reserve, the government re-opening and US-China optimism on reaching a trade deal have fueled recent reversal in the markets. Some market experts wouldn’t be surprised to see the Federal Reserve cut rates if the economy slows more than expected.
Does this Bull market continue or end?
Investors seem to believe this bull market has no end, but it will; we just don’t know when. Business cycles typically are composed of three stages - early, middle and late. This is generally followed by recession and is measured by various economic indicators. We are by no means forecasting or predicting when this will occur, we just know it will. The brightest minds in investing will try to guess or pinpoint when it may happen, but until all the data is gathered no one will know. We’re in a late cycle when growth slows, credit tightens, corporate earnings are reduced, interest rates increase, investor confidence peaks and inflation increases. We recently had an inverted yield curve, which can be a sign of an upcoming recession. An inverted yield curve is when short-term rates are higher than long-term rates. Investors may be more inclined to invest in higher quality (safer) short-term investments such as treasuries than take on more risk with a lower yield and longer time frame.
As of March 31, 2019, we are in earnings season and experts are predicting lower earnings and slowing growth. These are only two of the above-mentioned late cycle segments. We need to continue watching other late cycle segments. As we experienced within the last 120 days, the Federal Reserve was tightening, inflation briefly appeared, and investor confidence was impacted with the sell off. However, now that the Fed has paused, investors have returned to the markets and inflation seems to be non-existent.
What to do?
Continue to take profits that appear, make sure you remain balanced in your investment approach in-line with your needs and look for opportunities that are characteristic to long-term success. We still believe that emerging markets are in early cycle, meaning they are under-valued. These economies across global markets are typically faster growing when the U.S economy is slowing. We may be early, but hopefully patience will position us for future growth.
We look forward to our conversations, welcome your calls and appreciate your continued confidence.
Thomas L. Menzel, CFP® Laura Biermann, CFP®President Vice President
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