Times like these conjure up all manner of emotions.  We want to take a moment to remind our clients (and ourselves!) of a few long-standing investment and planning axioms:

 

1.        Timing the market is a fool’s errand.  It “feels” safe to take risk off the table as our confirmation bias shouts louder than what empirical data concludes: market returns are realized in as few as 10 days of market activity in any given year.  It’s impossible to time when those 10 days are going to occur.3  The re-entry point into the market is nearly impossible to time. 

2.       Market volatility is normal, and so is the business cycle.  2017 was an anomaly combining near-record low volatility with average market gains.  This can, and has dulled our senses to the reality that markets experience routine corrections.  Reacting to short-term market movements is like looking at the world through a soda-straw. 

3.       The “market” sees through an opaque crystal ball.  The market is constantly forecasting, often over- or under-shooting future economic indicators, and like a temperamental adolescent, tends to overreact to available information. 

4.       Having a financial plan that calculates the impact of market movements through a range of portfolio performance helps to provide a sense of commitment to your established, long-term goals.

5.       Proper asset allocation (mix of stocks, bonds, and cash) is an individualized, prescriptive way to dampen (or absorb) market volatility.  While it’s conventional wisdom that stocks outperform bonds over the long-run, the definition of “long-run” is unique to each person’s situation in life. 

Our investment committee remains committed to quarterly portfolio reviews.  While the recent market declines appear to widespread, the greater conviction is that diversification works.  We will continue to pay particular attention to fixed-income holdings in our upcoming reviews, mindful of the temptation to make knee-jerk reactions, but steadfast to our fiduciary obligations to act in your best interest.  We will also look to strategically harvest losses for those with taxable accounts, as well as rebalance where appropriate.

 

For those still curious, permit a brief hypothesis as to what is behind the recent volatility.

 

The Federal Reserve

You may be aware that the Federal Reserve, following its dual mandate of price stability and “maximum sustainable employment,” has been raising short-term interest rates over the past three years in attempt to curb inflationary pressure in our growing economy.The net effect is that the cost of borrowing increases and this has a ripple effect from the largest international banks, down to the consumer financing goods and services.

 

International Trade

China is the United States’ largest trade partner equal to $636B/year in goods and services.  The current administration is in a game of chicken with China regarding tariffs, with a yet-to-be realized outcome.  Higher tariffs act as a tax on international goods, and sand in the gears for exports, however, we feel that when this situation is resolved, it stands to reason that domestic trade deficits should decrease and be a net boon on the economy.

    

Legislative Uncertainty

November’s election results clearly swung the tide the political tide towards Democrats in the House of Representatives, signaling the strong potential for gridlock in Washington D.C., and effectively killing the hope for additional tax cuts, and possibly jeopardizing the current ones.  Most recently, the remaining government agencies not fully funded by Fiscal Year appropriations are shut-down.  Historically, markets have favored shared political power between the two major parties, however, it would seem that it is forecasting uncertainty to the detriment of future economic policies.

 

Economic Slowdown?

Despite 3rd quarter GDP ringing in at a strong 3.4%, and still rising consumer spending (responsible for up to 80% of the domestic economic activity), indications point to a slowdown in the pace of housing starts and a few other leading indicators.  However, it is worth noting that the Institute of Supply Management reports that November’s Non-Manufacturing Report of 60.7% is up .4% from October’s reading and significantly higher than the 50% threshold of growth vs. contraction. 3

References:

1.       https://www.chicagofed.org/research/dual-mandate/dual-mandate#note1

2.       https://www.instituteforsupplymanagement.org/ISMReport/NonMfgROB.cfm?SSO=1

3.       https://www.ifa.com/12steps/step4/missing_the_best_and_worst_days/

If you have any questions about the allocation of your portfolio, I look forward to meeting with you to discuss your long-term goals and discuss an appropriate allocation.  Your goals, not market predictions, are the most important criteria in determining your portfolio composition!

 

Happy New Year!

Rich Cullen

rich@fmiwealth.net

509.443.5174

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