Between 1926 and 2018, the S&P 500 experienced double-digit annual losses only 11 times. Not only did the market recover, but the index has never permanently lost ground in any rolling 15-year period during that timeframe.1
While past performance is no guarantee of future results, that bit of history is good for stock investors to keep in mind in the wake of recent market volatility. Here’s another factor to consider: Major stock movements in the market may not be reflective of what’s in your specific portfolio.2 In fact, if you’ve planned effectively, your portfolio is likely well diversified and aligned with your long-term goals. When you assemble a portfolio built for the long-term, those day-to-day fluctuations shouldn’t be a major concern, and they generally do not have a significant, long-term impact. If you’d like to review your current asset mix to determine if it’s designed to withstand market volatility going forward, please give us a call.
One trend gaining traction in portfolio construction is factor-based investing. This tactic analyzes stock characteristics associated with either higher returns or lower risk, by evaluating factors such as momentum, value and size. Some wealth managers see this as a way to enable better portfolio construction and risk management. Morningstar reports that investors currently hold nearly $800 billion in nearly 1,500 factor-based exchange-traded products.3
Another new development that may impact the stock market is the current U.S. trade war with China. Morgan Stanley projects that the recent collapse in trade negotiations and subsequent tariff hikes on Chinese products may edge the world economy closer to recession. In this scenario, the wealth manager anticipates that the Federal Reserve would drop the federal funds rate back to zero within a year.4
Wall Street also is keeping its eye on tensions with Iran. Even a minor confrontation could spur a hike in oil prices given the current tight supply line. One stock analyst pointed out that events in the energy industry (e.g., 1973 Saudi oil embargo, 1979 Iran revolution, 1990 Iraq invasion of Kuwait, the overthrow of Saddam Hussein in 2002-03) have terminated more periods of global economic expansion than any other type of event throughout the last 40 years.5
If you’re paying attention to corporate investments, you may be interested to know that many are still engaging in stock buybacks thanks to a lower corporate tax rate. Despite the fact that tax reform proponents claimed the lower rate would incentivize companies to reinvest in growth and expansion, that theory hasn’t panned out yet. In the first three quarters of 2018, stock buybacks increased by 52.6 percent whereas capital investment rose by only 8.8 percent. However, what may be bad news for job seekers could be fortunate news for investors. Buybacks reduce the number of outstanding shares of a company, which boost the earnings per share and typically lead to higher stock prices.6
However, there is another development on the horizon that is designed to get companies to focus more on long-range planning rather than short-term price hikes. The Long-Term Stock Exchange (LTSE), which recently received a nod of approval from the Securities and Exchange Commission, could provide another investment platform. Still months away from a launch with guidelines in the works, the objective of the LTSE is to reshape incentives for the next generation of public companies so that they can focus on the long term. In other words, the LTSE would host a platform for companies committed to implementing long-range plans rather than reacting to quarterly earnings expectations.7
Content prepared by Kara Stefan Communications.
1 T. Rowe Price. May 15, 2019. “3 Steps to Take When Markets Become Volatile.” https://www.troweprice.com/personal-investing/planning-and-research/t-rowe-price-insights/retirement-and-planning/personal-finance/3-steps-to-take-when-markets-are-volatile0.html. Accessed May 20, 2019.
3 Jeff Benjamin. Investment News. May 18, 2019. “The growth of factor-based investing.” https://www.investmentnews.com/article/20190518/FREE/190519942/the-growth-of-factor-based-investing. Accessed May 20, 2019.
4 Yahoo Finance. May 20, 2019. “Full blown trade war will push world towards recession – Morgan Stanley.” https://finance.yahoo.com/news/full-blow-trade-war-push-153826217.html. Accessed May 20, 2019.
5 William Watts. Marketwatch. May 16, 2019. “Are stock-market investors complacent about Iran?” https://www.marketwatch.com/story/are-stock-market-investors-ignoring-iran-just-like-they-ignored-china-2019-05-15. Accessed May 20, 2019.
6 Knowledge@Wharton. May 14, 2019. “Have Stock Buybacks Gone Too Far?” https://knowledge.wharton.upenn.edu/article/have-stock-buybacks-gone-too-far/. Accessed May 14, 2019.
7 Annie Gaus. TheStreet.com. May 18, 2019. “Stock Exchanges in Need of Reform. Is the Long-Term Stock Exchange the Answer?” https://www.thestreet.com/investing/stocks/stock-exchanges-need-reform-ltse-the-answer-silicon-valley-14964363. Accessed May 20, 2019.