The 2018 Market Drop: Not a Repeat of 2008
by Carolyn Walder
We at Lifetime Wealth Planning and Management are wishing you all the happiness and joy this holiday season and into the New Year! However, you may not be feeling so joyous over the performance of the markets and might be wondering, “What the heck is going on?”
There are many catalysts for a decline in the market. We have been calling for a correction for some time now. The effects of the ongoing tariff “wars” are starting to show up in corporate earnings calls as affecting their bottom line, so the outlook for companies is slower growth. Producer prices are starting to rise (another impact of trade wars), and wage pressures are rising, as unemployment is very low and persistent. This has not been inflationary as of yet, but these observations are the makings of inflation and have the Federal Reserve very concerned. The Federal Reserve has been focused on combating inflation and has been aggressive about being ahead of inflation by raising short-term interest rates. However, the fear now is that the Federal Reserve will be too aggressive and will push us into a recession as the cost of borrowing increases for both consumers and corporate America. All of these things point to a slowdown in corporate profits, particularly after the record profits recorded in 2017 due to the corporate tax cut. (In general, the “stock market” rises in response to growing, or anticipated growing, corporate earnings and tends to fall in response to a fall in anticipated, or actual, corporate earnings growth.) However, the effects of the tax cuts have been extremely short-lived (as predicted), thus earnings growth has to come from somewhere else. Given the factors discussed above, the environment is setting up for a slowdown in earnings growth. Global growth has been declining after the synchronous global growth in 2017. It is not recessionary as of yet, but the fear is out there. All of that coupled with the political chaos in Washington has been extremely unnerving for the markets, sort of a “perfect storm.” It is no wonder that the market has reacted so violently. Furthermore, during the holiday season, trading volume is light because many folks are on vacation, so volatility can be amplified and these market swings can be even more exaggerated.
So where does that leave us? First of all, this is not 2008. The U.S. economy and corporate earnings are still growing and there are no systemic problems that would point to a severe recession like that in 2008 and 2009. Yes, growth is slowing and corporate profits are slowing, we have a huge deficit, and Washington is dysfunctional right now. There is tremendous uncertainty in the markets, and the momentum in the stock market is currently down. We do not know when things will turn around, but we do anticipate that they will. For example, if the ongoing trade “war” with China gets resolved and tariffs are removed, we would expect a favorable market reaction. We would also expect the markets to respond positively if the Federal Reserve signals a pause in interest rate increases. However, we likely will be in for a recession in the next few years as that is how economic cycles go. We do not know if this is a severe correction or the start of a bear market. It is important to note that corrections typically last 3.5 months on average (according to MarketWatch), while the average “bear” lasts about 16 months (according to data from First Trust advisors).
As you might imagine, we do NOT advocate selling or changing allocations in response to a declining stock market. We cannot (and will not) time the markets; however, we WILL be reviewing rebalancing reports to see if we can take advantage of the volatility. We are also looking for opportunities for tax loss harvesting before the end of the year, so do not be surprised if you see trade confirmations showing up.
For our clients who are still working, we urge you to continue to save into their 401ks, IRAs, and Roth IRAs (if eligible) to take advantage of buying “low.” For our clients in retirement who may be taking income from your portfolio, please know that we are generating that income from your fixed-income portion of your portfolio which has increased over the last month. We want you to know that we are continuing to work on your behalf to take advantage of any opportunities and urge you to remain calm in this stock market “storm.” We would be happy to hear from you to answer any questions that you may have, but please understand if we take some time to get back to you as we only have a few more days in 2018 to get all the year-end review (and potential trading) finished. Thank you for the opportunity to serve you!