For those of you who are prone to follow the business news, it has been hard to avoid the headlines that the stock market, both in terms of length and price, has HIT A NEW RECORD! Whoohoo! Many investors, though, are weary of all this stock market ebullience. Even though we are nine years into this record expansion, 1 in 3 Americans tell us that they’re “losing sleep over money,” said Mark Hamrick, senior economic analyst at Bankrate.com. To many the latest news about the stock market feels more surreal than real. We know the continued upward rise in the market and our portfolios can’t last forever. So we ask, “What part of the market rise is based on solid fundamentals and what part is froth?” “When will the stock market come back to earth, and how much of a fall will it take to bring it back to a more sustainable trajectory?” The answers lie in part in understanding how we got here in the first place from the last market trough way back in 2009.
Back then the economy suffered from a fairly steep contraction brought on by the housing market crises. Although the US economy seems to have fully recovered from the great recession, problems like anemic wage growth and lagging productivity remain. Despite these issues, the US economy and stock market have outperformed much of the world by a considerable margin. Over the past nine years, the S&P 500 grew at an annualized rate of 14.8%, while other developed economy stocks–not including the US–grew by 8.3 %, and emerging markets grew by 5.3%. Much of this growth has been sustained by booming corporate profits. According to USA today, corporate profits in the first two quarters of 2018 are growing at the fastest pace in nearly eight years. Finally, cheap credit, provided not just by the Federal Reserve but by most of the developed economy’s banking systems, have undergirded world stock market performance. Since the great recession, investors have been drawn into buying stocks, because bond or money market yields have been very low.
Markets pundits are quick to say, “bull markets don’t die of old age”; however, it is also true that over the past 100 years we have not made any progress in eliminating the business cycle (or in my opinion, even smoothing out the cycle). In other words, ups and downs in the market are inevitable. Academic research can provide us insights in the nature of economic cycles, but it offers precious little predictive power in forecasting when these ups and downs will occur and how long they will last. We can only be certain that these cycles will continue to occur.
Undoubtedly, portfolios will dip in the upcoming downturn but will also recover as long as you stay invested. We can ride out market volatility by maintaining a consistent investment strategy throughout good times and bad. Christina and I are here to help you maintain your investment discipline and keep you on track for meeting your goals regardless of the market environment. We welcome your insights and questions!
