01 Feb 2019 Market Volatility Down For Now

Remember that awful market drop starting in mid-September of last year? A strong market rally in January, the strongest in 30 years, is two thirds the way toward erasing it. The Fed pausing their rate increases for a while, China coming to the bargaining table in earnest, thousands of new private sector jobs created suggesting businesses largely ignored the government shutdown and bad weather, and 71% of S&P 500 companies reporting positive earnings surprises have all combined to restore confidence in the US economy among investors.

The Federal Reserve likely deserves a large share of the credit for both the market decline and for its rapid recovery says the Wall Street Journal’s James Mackintosh. Fed Chair Jerome Powell surprised investors last year with predictions of further rate rises even as it was clear the global economy was rapidly slowing. But in a January, he did a 180 in tone and abandoned talk of rate hikes for now. His comments boosted credit markets and stocks in general, and particularly helped the stocks of highly indebted companies.

President Trump’s tariffs are widely being credited for bringing China to the bargaining with a seriousness and urgency unseen to date. With their growth in GDP the worst in ten years, the country’s leaders are anxious to restore trading to normal levels. Mr. Trump is anxious to reduce the huge trade imbalances favoring China as well as to end China’s use brazen theft of intellectual property and malicious cyber activities. Experts give the latter objective little hope as China has made it abundantly clear they want to be the world’s dominant economy military power.

The US economy added a whopping 304,000 new jobs in January, nearly doubling economists estimates and in spite of the government shutdown. This level of job growth has only been achieved four times in the last four years. Private sector jobs contributed to most of the total, rising by 296,000. The report from the Labor Department shows that hiring increased in almost every category. According to the WSJ, the labor market has been a pillar of stability during the economic expansion with employers adding jobs every month since October 2010, two times longer than the next longest stretch of 48 months concluding in June of 1990.

By January 24, some 21% of S&P 500 companies, 106 of them, had reported their earnings, according to Factset. In their latest briefing, Factset reports that 34 companies mentioned the government shutdown in their earnings calls with 13 saying they saw no impact on their earnings, and 15 saying they saw some direct or indirect negative impact on their earnings.
Overall, 13 of the 34 companies that have discussed the term “shutdown” on their earnings calls saw no impact from the government shutdown. Four said it was too early to assess the impact with any accuracy.

We thought it would be helpful to show how our various model portfolios behaved during the market’s most recent bout of volatility starting September 20, 2018. Please bear in mind that these results do not precisely represent our actual portfolio results as the index prices do not included dividends, which boost returns, or fees, which reduce returns.

The chart is intended to demonstrate the relationship between volatility, (or risk) increases as the allocation of stocks in an investment portfolio is increased. Returns increase as well, but at a cost.

Volatility or risk is only important if you are adding money to or pulling it from your portfolio. As you can see the Beacon 30 (our model containing 30% stocks) was reasonably stable through the large December dip. As the percentage of stocks increases, so does the dip, or volatility. Money pulled from high stock portfolios like the Beacon 90 was especially costly as the whole was depleted by 17% at the worst of the decline. The Beacon 30 on the other hand was depleted by only 3.6% at its worst dip making it easier to withdraw funds by comparison.

Returns are important too, though. Some plans need the higher returns that come with more stocks in order to accomplish future goals. The important takeaway, especially during times like these, is take no more risk than you can tolerate or than is necessary to confidently meet future needs. And the only way we know you can be sure is to have a comprehensive life-goals plan that embodies every aspect of the future you envision.

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