Santa’s sleigh is usually pulled by reindeer. This year, it looks as if it will be pulled by a team of bears. My nine year old son witnessed me reviewing market charts on my iPad Saturday morning and correctly remarked “Don’t worry dad, it is Saturday - Advisor Client can’t go down on the weekend.” It was amusing because it was true. And it also is a painful reminder of how quickly the market pendulum can swing - sometimes against us.
Nowhere to Hide
December 2018 is the worst December on record since The Great Depression and has managed to erase all stock market gains since mid 2017. Nasdaq is now officially in a bear market and the Dow and S&P are within 2% of a Bear market (down 18% from the September highs). Everything is down in a year that started with such promise back in January. In fact, the only traded asset class which is positive in 2018 has been money market funds. US stocks, International stocks, Emerging markets stocks, most commodities, and nearly all fixed income markets are negative in 2018 thus far.
On the news over the past few days I’ve heard a lot of recession talk. A stock market behaving like this could be signaling a slow down or recession. But when I look around, it sure doesn’t feel like a recession. The LEI Index (Leading Economic Indicators) has been up 4.4% over the last few months, and the jobless rate is near an all-time low. Anecdotally, I couldn’t find a parking spot at Costco or the mall on Saturday. People are out and about spending money. It seems like this Christmas season will be very strong for retailers. I filled up the gas tank at $1.97 per gallon, to boot!
Perhaps instead of signaling a recession, the combination of a government shutdown, the Fed continuing to raise rates, the prospects of a corporate profit slowdown, and the Chinese Tariff negotiation is just a little too much for the market to handle right now. The market has handled the government shutdown threat dozens of times before (this is the 3rd shutdown this year). Corporate profits will be slowing in 2019 but estimates are still in the high single digits for growth. The Fed has indicated it believes the economy is strong enough to continue raising rates at a measured pace. Perhaps instead of signaling a recession, this could be a great buying opportunity.
Bear Market Facts
Our old friends at LPL Research share with us the bear market data going back to WWII (see chart above “Not All Bear Markets Are Created Equal”). Bear markets accompanied by a recession were quite painful, losing 37% on average. On the flip side, non-recessionary bears weren’t as painful, with 3 out of the last 4 capped at a 20% loss.
The last bear market was in 2011 (the non-recessionary type) and short-lived. You may recall it was a result of the downgrade of the US debt by Standard & Poors. And of course we all remember 2001 and 2008 (both recessions), both down around 50% from peak to trough. Not only were both recessions, but unique circumstances lead up to the steep drops. In 2000/2001, stocks were generally in a bubble (particularly tech stocks) with a market PE ratio of 33 (today the market PE is 18) and in 2008 we had the mortgage crisis, which took down many of the banks (banks are regarded as strong today).
We are Your Coach
As your financial coach, our job is to help you make great decisions which yields success. One important decision is how much investment risk is appropriate for your situation and tolerance. Our goal is to recommend strategies where you are comfortable and do not panic. Overreacting in times like these can compound our problems.
If you are concerned, please consider taking our onlineRiskalyzequiz. Further, login to your planwithpeak.com online financial plan and review your analysis. Has the recent market decline affected your retirement income?
Finally, call us at 734-681-7575. We are here to talk things through. We are here for you!
Peak Wealth Management is a fee based financial planning firm located in Plymouth, Michigan. Nick Hopwood, CFP has over 19 years of experience as a financial advisor serving clients investment management needs and financial planning needs for goals which are important to them such as retirement planning.