MARKET WATCH
Volatility returned to the markets in earnest as the first quarter of the year ended in conjunction with the Easter and Passover holy days. The first three months of 2018 delivered new records for the major stock indices, as well as a correction. In between, there have been some major advances and declines in the markets as traders and investors search for direction going forward. Perhaps the idea of a synchronized global expansion led to some overheated animal spirits and the difficult winter just put a damper on the mood.
To review where we’ve been during the first quarter, it’s only fitting to congratulate the Philadelphia Eagles for their victory over the New England Patriots for the city’s first Super Bowl win. Of course, the Eagles being an original NFL team, as well as the January Barometer being ablaze, did set the markets off to the races, with just a little too much complacency. Then winter set in and only recently began grudgingly to give way to spring. The Dow Jones Industrial Average (DJIA*) sprinted to a new record of 26,616.17 on January 26th, and then it corrected to 23,533.20, an 11.58% drop. The DJIA* closed out the quarter at 24,103.11 which means it is down 2.49% year to date. The S&P 500* also set a new record on January 26th when it closed at 2,872.87 and then it corrected 10.15% to 2,582.00. The S&P 500* recovered to 2,640.87 which means the index is off 1.22% year to date. Last but not least, the NASDAQ*, the home of the technology stocks, continued to set new records through the winter. It closed at 7,588.32 on March 12th and then corrected to 6,777.16 for a 10.69% decline. By the end of the quarter, the NASDAQ* was the one index still in positive territory being up 2.32% year to date and it closed at the 7,063.45 level. Quite a ride, I’d say.
In past newsletters, I’ve discussed the current economic cycle and the length of time it took to transition from recovery to expansion. I mention this because the statistics I’ve been analyzing seem to affirm the conclusion this business cycle could actually exceed the length of the record 1990’s business cycle, which was ten years. Interestingly, the United Kingdom had a record business cycle that lasted from the early 1990’s until 2008 when their economy finally succumbed to the Great Recession. While governments strive to keep workers employed, inflation tame, a balance of business and labor fairness, limited environmental damage, international trade balance and increasing the time between booms and busts during business cycles, these goals are not easily achieved. The concept of a synchronized global expansion seems to be a reality, at this point in time, and government policies including managing interest rates and employment to utilizing tariffs to negotiate trade deals most certainly will be factors in determining the longevity of this current business cycle.
According to the most recent report on Gross Domestic Product (GDP) from the Bureau of Economic Analysis (BEA) released on March 28th, GDP increased 2.9% in the 4th quarter of 2017 and 3.2% in the 3rd quarter. Annual GDP growth for 2017 was 2.3% compared to 1.5% in 2016. Personal consumption expenditures (PCE) were strong additions to GDP, reflecting consumer strength. Private inventory investment, the difference between goods produced and goods sold was negative, which indicates businesses are seeing higher demand than anticipated, which is usually seen at the beginning of an expansion. Increased imports in relation to exports also detracted from GDP. The Bureau of Labor and Statistics (BLS) reported the February unemployment rate at 4.1% and the labor force participation rate edged up to 63%, well below the 67.1% rate maintained during the 1990’s expansion. This indicates there is still some slack in the labor force, which should keep inflation tame. The next employment report will be released on April 6th. The Fed raised the Federal Funds interest rate to 1.50% - 1.75% at the March meeting citing inflation, after adjusting for food and energy, was still below their 2% target and that the economic outlook had strengthened in recent months. Without adjusting for food and energy, inflation was 2.2% annually in February, according to the Consumer Price Index report on March 23rd. The Producer Price Index was 2.7% in February.
Rebalancing Assets in Your Portfolio
You can rebalance your portfolio in different ways to bring it back in line with the allocation balance you intend it to have. Here are three common approaches to rebalancing:
- Redirect money to the lagging asset classes until they return to the percentage of your total portfolio that they held in your original allocation.
- Add new investments to the lagging asset classes, concentrating a larger percentage of your contributions on those classes.
- Sell off a portion of your holdings within the asset classes that are outperforming others. You may then reinvest the profits in the lagging asset classes.
All three approaches work well, but some people are more comfortable with the first two alternatives than the third. They find it hard to sell off investments that are doing well in order to put money into those that aren't. Remember, though, that if you invest in the lagging classes, you'll be positioned to benefit if they turn around and begin to prosper again. If you have any questions about rebalancing, about your accounts or to schedule an appointment, please feel free to contact me.
Diversification Among Asset Classes Is Crucial to Portfolio Health
When markets correct, or the cycle switches from a bull market to a bear market, investors often wonder what strategy is the correct one to pursue. Nobody has a crystal ball to know when this shift will occur, so looking at history is one way to try to understand how to proceed. After the “dot com” bubble burst in 2000, there was a rotation out of technology into real estate, energy, natural resources, bonds and emerging markets. Long term holders of real estate and these other asset classes saw huge gains, and mutual funds in these asset classes were the market leaders. When real estate, bonds and stocks tanked during the last recession, investors realized there was no place to hide during market mayhem. All asset classes were subject to the bear market that ensued. Even money market funds, while considered a safe place to park cash, virtually had no return for a decade.
However, when you look at the statistics, patience really emerged as the best strategy. Throughout history, the average bear market has lasted for 15 months, with stocks declining 32 percent. A bear market is defined as a 20 percent or more drop in an asset class, such as stocks, bonds or commodities. The most recent bear market lasted 17 months, from October 2007 to March 2009. During that time, there was a 54 percent decline in the Dow Jones Industrial Average (DJIA)*. A diversified portfolio is not only invested in the DJIA* or S&P 500*, so while gains may not achieve the same levels as the indices, losses also are not as steep.
In my opinion, the idea is not to switch asset classes and try to time these cycles, but rather to attempt to build a diversified portfolio, which holds positions in all asset classes and all major sectors of the global economy. This requires a great deal of discipline, because it means holding and purchasing positions, which may be out of favor, at the same time you are building positions in sectors, which are in favor. This is why I recommend adding to your portfolio through dollar cost averaging*, and monitoring your performance on a calendar year basis. I’m not advocating ignoring your performance weekly or monthly, but rather recommending that you compare the annual or semi-annual performance of your investments on an apples to apples basis.
When you evaluate the performance of the investments on your statement, either by checking a newspaper, or reviewing them on the web, you only get a snapshot of the performance on that date. You will get the year to date return, which is valuable, but the 3 and 5 year returns are as of the date on which you are doing the research. While this information is definitely useful, be sure to check your year-end data to analyze your annual performance from year to year.
Performance in the stock market varies widely during the course of an average year, and corrections can occur at any time. Having a diversified portfolio and a disciplined approach to adding new capital to your accounts will keep you investing during times when stocks “go on sale”. This should keep you from making knee jerk decisions based on short term news events, and can enhance your overall annual performance.
Company Information
John H. Kaighn offers various products and services under the trade name of Jersey Benefits Advisors.
PO Box 1406
Ocean City, NJ 08270
Phone: (609) 827-0194
Fax: (856) 637-2479
Email: kaighn@jerseybenefits.com
http://jerseybenefits.com
John H. Kaighn is an Investment Advisor Representative and Registered Representative with Signator Investors, Inc. Securities and investment advisory services are offered through Signator Investors, Inc., Member FINRA, SIPC, and a Registered Investment Adviser with the SEC.199-20180409-445706
200 Berkeley Street
Boston, MA 02116
Signator Investors, Inc. is not affiliated with Jersey Benefits Advisors or Jersey Benefits Group, Inc.
Insurance Services and Third Party Administration offered through Jersey Benefits Group, Inc., a licensed Insurance Agency in the State of New Jersey.
PO Box 1406
Ocean City, NJ 08226
Phone: (609) 827-0194
Fax: (856) 637-2479
Email: kaighn@jerseybenefits.com
http://jerseybenefits.com
All opinions expressed in this newsletter are independent of Signator Investors, Inc. and solely those of John H. Kaighn and Jersey Benefits Advisors.
*The S&P 500, the DJIA, the NASDAQ and others referenced are unmanaged indices that are widely used as indicators of market trends. Past performance does not guarantee future results and the performance of these indices does not reflect the fees and charges associated with investing. It is not possible to invest directly in an index.
*Dollar Cost Averaging through a systematic savings plan is an excellent way to build an account without a sizeable initial investment. Saving a portion of our pay each month is very important. Company sponsored pension plans are one method to save and should be used for retirement. Other systematic investment accounts, such as ROTH IRA’s, Traditional IRA’s, Coverdell Accounts, 529 Plans, Brokerage Accounts and Annuities can also be opened, and debited directly from checking or savings accounts. For more information, just call to set up an appointment. Referrals are always welcome.
John H. Kaighn
