What a difference a week makes. One week ago I was wishing we had more growth stocks and less bonds in some of our accounts. Today, I find myself wishing the exact opposite. I wish we had more bonds and less growth stocks because of the drop in the market the last few days.
The volatility we’ve seen this week goes to show how fragile the stock market
can be. Just a change in mood has been enough to erase most the gains in our growth portfolio this year.
The quick change of mood in the stock market reminds me of how quickly my two girls’ mood can change. This picture of my daughter Lucy shows just about anything – even struggling to put on a tutu – can send her into a tizzy!
So, let’s try to break down what’s causing the sour mood we’ve witnessed in the stock market the last few days:
1. Economy is still doing well. Unemployment? Low! Economy? Growing! You would think this is good news, but it turns out that it’s not. Jerome Powell from the Federal Reserve wants to raise interest rates more aggressively to slow the economy down so we don’t get inflation. This good news then becomes bad news for the stock market.
2. Growth and Tech companies are overpriced. These high-growth names, some of which we have in our growth portfolio, were too expensive and are due for a pullback to more normal levels. We’ve felt this way for a long time, but they just kept going up. Unfortunately, when stocks pull back, they don’t do so gently. Hence the saying, stocks take the stairs up, but the elevator down!
3. China trade worries. Even though we were able to strike a new trade deal with Canada and Mexico, a new trade deal with China doesn’t seem to be coming together. My opinion is there’s not much motivation on the part of our president to get this deal done until closer to his election in 2020. Although I hope we get a deal before then, we might have to wait.
There is certainly more to the story than this, but I believe this is most of it. So, what should we do?
1. Sit tight. Let the rest of this downturn play out and as we head into earnings season and nerves settle down. Companies are reporting earnings as soon as tonight and are expected to continue to show good growth because of the tax reform from last year.
2. Invest more. After things settle down, we’ll consider adding to the investments from money still in cash. We’ve done this many times now: March 2009, July 2011, Jan 2016, June 2016, Feb 2018… Without exception, putting money to work in the midst of a downturn has been a good decision, including earlier this year.
3. Discuss other options. If you find yourself in a sour mood about your particular situation, please contact us so we can address those feelings and discuss what changes, if any, we should make to your portfolio in the future.
Just to put this into perspective: there are concerns about the economy – there always are – but, these concerns are mostly in-line with a stock market that’s been growing for a long time now (i.e. higher interest rates, overpriced companies). While we may be due for a pullback, we don’t expect a crisis like what we went through ten years ago when the wheels were falling off our financial system.
Although it’s uncomfortable to watch values drop, we are comfortable knowing these events are not permanent and we hope to return to normal soon.
Thanks for reading. Please contact us with any questions.
– Bruce Porter & Tim Porter, CFP®