In spite of continued positive economic news, last month will be remembered for the uncharacteristic drop in the equities market. The month of December, and the fourth quarter in general, has historically yielded strong returns. In contrast to history, the S&P 500 dropped a sharp 10.16% for the month. The causes for the decline are the same triggers which have concerned investors for months now: the Federal Reserve raising interest rates too quickly and concerns about tariffs abroad.
There were additional worries which compounded the sentiment, including a government shutdown, questions about the Brexit, and potential slowing growth globally. In steep contrast, our economy seemingly remains fundamentally strong with low unemployment, high consumer confidence, and strong consumer spending. (1)
The Federal Reserve & Interest Rates
Arguably, the greatest cause for the selloff was the continued rise in interest rates by the Federal Reserve. First, let’s take a look at the Federal Reserve, their role in controlling economic growth, and the impact of rising and falling interest rates. The Federal Reserve sets interest rates which impact the cost of borrowing for banks and consumers alike. When interest rates are low, the cost of borrowing money is low and economic growth usually follows (such was the case after the Financial Crisis in 2008/2009). The inverse is also true; when the Fed raises interest rates the economy will “pump the brakes.” When the economy is firing on all cylinders, the Federal Reserve will step in and raise interest rates to slow the growth.
It seems counter-intuitive to want to slow an economy down, but it is fundamentally necessary to prevent large “boom and bust” cycles from occurring due to speculative bubbles forming during strong rises in asset prices. Before the Great Depression, the roaring economic conditions of the 1920s led to speculative bubbles followed by the inevitable, unprecedented drop which led to economic turmoil for over a decade.
Last year, the Fed raised interest rates steadily in light of the strong economic conditions. The rise in interest rates has seemingly done little to slow economic growth so far, but it did put fear into the broader stock market. Few economists, fund managers, and investors expected such a sudden fall in stock prices and market sentiment considering the fundamental economy remains strong. Recently, the Federal Reserve has responded to this overreaction and stated that they would “be patient” and “listen very carefully” to the market before implementing any further interest rate increases. (1)
Last month was one of the most volatile months in recent Wall Street history. The S&P 500 had nine intraday moves of at least 1% or more (as opposed to only eight instances during all of 2017). The Dow Jones Industrial Average gained 1,000 points in a single day for the first time. The ups and downs tested the patience of investors, both large and small. January will likely continue to experience large single day market moves, both up and down, with sensationalized news headlines to justify every move. A large gain up one day might be followed with a large day down the next – but prudent investment management is about not getting emotionally invested in either swing.
Investors are understandably uneased with the recent market volatility. At its core, a sound saving and investment strategy for pre-retirees is developed and based upon risk tolerance, time horizon, and goals. That big-picture approach will inevitably endure times of market instability and downturns, but has also historically pay dividends over the long run.
What can we expect moving into the first quarter of 2019? Many predictions are bullish, and some to remarkable degree. USA Today recently polled a range of Wall Street investment strategists, and they thought the S&P 500 would gain about 25% this year, on average. Is this just wishful thinking, drenched in blue sky? Anything is possible, but for returns such as those, we would likely need help from the Federal Reserve, an end to the trade war between China and the U.S., a comeback for oil, and positive earnings reports from the largest U.S. Companies.
Monthly Financial Tip:
If you have a high-interest credit card, you may want to search to see if you can refinance the balance to a lower-interest card. A lower-interest card means a greater percentage of your payments will be applied to principal rather than interest.
1 - markets.wsj.com/us [12/31/18]
2 - cnbc.com/2019/01/04/powell-says-fed-will-be-patient-with-monetary-policy-as-they-watch-how-economy-does.html [01/04/2019]
3 - tinyurl.com/y94rpn9x [12/24/18]
This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.