A Few Thoughts on the Market
I believe most investors have gotten smarter over the years. There's less paying attention to news and short-term market swings. Maybe that speaks to what great clients we have.
I have been surprised how the last few months has wound up some people. I always emphasize separating politics from portfolios, but even I have to admit, it's been hard to do. We seem to be entering into a world with government austerity, less immigration and tariffs (i.e. corporate tax.) None of this is good for the markets on the surface. As I write this, the S&P is back down to where it was in September. But international stocks are up. Bonds are up. Portfolios by in large have held up well.
Who knows what happens going forward, but we would not be good risk managers if we allowed for what we thought was going to happen impact what financial plans have planned for and are built to protect against. I'm fond of something Jason Zweig once said:
"While people need good advice, what they want is advice that sounds good. The advice that sounds the best in the short run is always the most dangerous in the long run. Everyone wants the secret, the key, the roadmap to the primrose path that leads to El Dorado: the magical low-risk, high-return investment that can double your money in no time. Everyone wants to chase the returns of whatever has been hottest and to shun whatever has gone cold. Most financial journalism, like most of Wall Street itself, is dedicated to a basic principle of marketing: When the ducks quack, feed ‘em.
In practice, for most of the media, that requires telling people to buy Internet stocks in 1999 and early 2000; explaining, in 2005 and 2006, how to “flip” houses; in 2008 and 2009, it meant telling people to dump their stocks and even to buy “leveraged inverse” exchange-traded funds that made explosively risky bets against stocks; and ever since 2008, it has meant touting bonds and the “safety trade” like high-dividend-paying stocks and so-called minimum-volatility stocks."
So here is the good advice, even if it doesn't sound good. If you are an accumulator, there are now opportunities to buy great companies at a lower price than you did three months ago. Today it's tariffs. Two years from now it's something else. A decade from now, something else altogether. Just keep buying. For retirees and soon-to-be retirees, all is well so long as you have an appropriate asset-liability mismatch (decumulation plan) in place. Again, risk management has nothing to do about predicting what happens next.
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A few other random thoughts.
In my opinion, the president doesn't have it in him to stomach a significant drawdown in the markets if in fact the drawdown is a result of bad policy. This time may be different, but we can look back to 2018 as a reference to softening tone when things go sideways. There are mid-term elections almost 18 months from now, after all. We'll see if they're singing the same tune if the S&P 500 is off another 20%.
'They are saying.' I've heard this a lot lately. Keep in mind that 'they' also said there was a 100% chance of a recession in 2022 which never came to pass. While you can make a lot of money selling absolute certainty, the reality is we can't even effectively interpret what's going on in real time, let alone predict the future. Even if you know what happens, you never know how markets react.
The most surprising piece of data I've heard comes from Nick Colas, who noted that of the 100 lowest VIX closes in history (it was introduced in 1990), 80 came during the first Trump term. There was a massive disconnect between the news and market reaction. We'll see if there's a similar relationship this time around. As I noted above, most portfolios have hung in there given headlines. Without looking, I think most investors would assume the market was off 20%.
Don't be too quick to dismiss the Mag 7 or domestic growth stocks in general. Eventually, their ride will be over as a market leader. But there's been countless head fakes since 2009.
These are the types of markets where blocking and tackling really make a difference. The aforementioned diversification, portfolio rebalancing, tax-loss harvesting and/or direct indexing of taxable money.
What stock replaced Enron in the S&P 500 back in 2001? A little-known company based in Santa Clara, CA making computer graphic chips called Nvidia, Corp. Buying an index fund can unknowingly be the best momentum trade going.
Thanks for reading - hang in there.
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Sources:
Four Rules for Negative Market Catalysts
Saving Investors From Themselves
The content in this article was prepared by the article’s author and is not intended to provide specific advice or recommendations for any individual. Voya Financial Advisors does not endorse its content, and the views expressed may not necessarily reflect those held by Voya Financial Advisors.
