The beginning of 2016 started in an emotional frenzy, as world markets dropped sharply out of the gates on fears of a sputtering world economy, plummeting commodity prices, a stubbornly hawkish Federal Reserve, and a decelerating earnings backdrop. The violence of the move in January was stunning, and by early February the number of world markets that had fallen more than 20% from their highs clearly argued that a bear market across the globe was taking place. But with share prices falling so fast, gloom quickly took hold and set the market up for a rally off the lows. What has unfolded since mid-February is a rally to the upside that has been just as violent and abrupt as the drop in markets that preceded it. The genesis of the rally was likely too much short term pessimism and oversold conditions, but it was also aided by more European central bank intervention and a Federal Reserve that was forced to pull back some of its hawkish rhetoric.
Is a portfolio worth $500,000 a lot of money for retirement? How about $1 million? What if you’ve saved $5 million? I get asked this a lot, and I find it helps to reframe the question: Is $2,000 a month a lot of money? What about $5,000 a month? Or $10,000?
When you look at it this way, you probably already know your answer. That’s because we generally conceive of wealth in terms of current income and not assets. Think about it: We pay income taxes and see our tax withholding on every pay stub, and we routinely deal with monthly bills and expenses that must be paid with current income.
With the Federal Reserve recently raising interest rates for the first time in many years, the U.S. economy may be at the beginning of a transition away from the ultra-accommodative monetary policy environment that has existed since the global financial crisis. However, central banks in other major developed economies are not following suit—in fact, they are still trying to counteract the current low growth, low inflation economic environment.
As the laws governing how financial professionals guide client retirement assets are set to change, financial advisors are being required to place the interests of their clients first. With this change, all advisors must not only recommend investments that are suitable for their clients, but more importantly, they must act as a fiduciary and place their clients’ interests ahead of their own.
So how will this affect the investments of Pinnacle clients? It won’t.
2015 had many twists and turns, but from a financial market perspective, it was effectively a road to nowhere when looking across a variety of asset classes. In U.S. equity markets, large company stocks (large cap) barely moved as just a few sectors and stocks were big winners. In the broad market, many stocks performed far worse than the large cap averages and gave investors the false impression that the market was generally flat. On the contrary, a broader measure of the market which consists of 1700 equally weighted stocks was down roughly 7% on the year, and helps to highlight how skewed the major indices were, due to just a few large companies that had good years.
The S&P 500 Index is down over 12% from its high last May, which qualifies as a market correction but not a bear market. In fact, it’s been quite a while since we experienced our last bear, although it may not feel that way. From April to October of 2011, the stock market declined by 19.39% on a closing basis. While experts can debate whether this meets the definition of a bear market (which are typically defined as 20% declines), those who remember it will recall how scary it was. By the time the market bottomed in October, many were recalling the 2007–2009 bear market, which was gut wrenching for everyone. During that excruciating market decline, the S&P 500 Index fell by 55% and the economy tumbled into a deep recession. It is only in hindsight that we can see that both the market bottom in 2009 and the October low in 2011 marked important market bottoms. Since October of 2011, the S&P 500 Index rallied 94% to its eventual high set in May of last year.
The third quarter came in like a lamb and went out like a lion, as the return of volatility hit risk assets hard across the globe. As in previous quarters, emerging market stocks and commodities suffered double digit declines as markets continue to deal with the end of the commodity super-cycle and the mix of structural and cyclical problems reverberating throughout the emerging market complex. But the big news of the quarter was a catch up in developed markets that had previously appeared impervious to the problems that were festering in the developing world.
We’ve recently changed our cyclical view, as we don’t think the recent downdraft we’ve been experiencing is over yet. In fact, while many believe we’re experiencing a ‘garden variety pullback’ that provides us with a buying opportunity, we believe there’s a growing probability that the long running cyclical bull market may be transitioning into a cyclical bear market. We could be wrong—and hope that we are. But hope is not a strategy and we need to align with the evidence that calls for playing defense and protecting against a possible change in the market cycle.