White Elephant

Monday, December 24, 2018

By: Christopher P. Cline, CEO and President Riverview Trust Company

The worst December for stocks since the Great Depression. A decline in the Nasdaq of more than 20% since its high in August, dropping it into Bear territory. A loss of $1.2 trillion in value from Facebook, Amazon, Apple, Alphabet, Netflix and Microsoft.

 Bah, Humbug.

Investors, seeing a trade spat with China, a government shutdown and diminishing benefit from the 2017 tax cuts, are growing more worried about a slowing U.S. economy and a subsequent recession.

Other troubling economic data includes a projection that the Fed will raise rates two more times in 2019, and slowing of new housing starts, brought on in part by higher mortgage rates. It didn’t help that Treasury Secretary Steven Mnuchin held calls yesterday with the six largest banks to “reassure” investors. Since it wasn’t totally clear why the call was needed, it may have raised more questions, rather than answered them.

In the larger context, though, Secretary Mnuchin made some valid points. He stated that “[w]e continue to see strong economic growth in the U.S. economy with robust activity from consumers and business.” His statements are backed up by recent articles in The Wall Street Journal, citing the fact that consumers are both spending more and saving more, and that this holiday shopping season has exceeded even the retail sector’s already lofty targets. Further, unemployment remains at historically low levels and corporate earnings have been strong this year (although they have started to slow as tariffs kick in).

These facts point to a strange but reassuring paradox. Investors seem worried about a recession, but economists don’t (at least not yet, anyway). CNN Business reported that most economists don’t project a recession happening until 2020. In other words, 2019, though volatile, could still be a good year for equity investors. International stocks in particular could see growth, as they are priced much lower than U.S. stocks.

Still, market directions are far from clear, and the economy and markets could be in for a rough 2019. What does that mean?

•  First, if you are near retirement, make sure you have enough in cash to support yourself in the short term, so that you don’t have to sell stocks or bonds in a down market.
• Second, market dips present buying opportunities; as valuations drop, rebalancing can prepare you for the next bull market.
• Third, if you’re a long-term investor (as most of us are), recession doesn’t mean much at all. As we pointed out back in February, if you invested $10,000 in the S&P 500 in October 2007 (at the height of the market and just before the crash) and held it until the end of January 2018, your investment would have generated a 131% cumulative total return, increasing to $23,101. You would have more than doubled your money even after losing half of it in the first six months.
• Finally, getting out of the market too soon can create a double loss: not only do you miss the remaining growth before the market drop, you also run the risk of missing the subsequent run-up after the market bottoms out by hesitating to get back in.

In short, the best response is to take a deep breath and see this unsettling moment n context. Take the time to see this market drop for what it is: simply the market doing what the market does. Have a plan for your investments and just execute on it.

And while you’re at it, do what we’re all supposed to do this time of year: Be grateful. Whether you celebrate the joy of Christmas, the miracle of Hanukkah, or just the gift of the lengthening of daylight, kiss your loved ones and count your blessings. Markets go down and up. Focus on what really matters.