Ah, floating on a cloud. Gradually going higher without many bumps. That was the stock market in 2017.
At the beginning of 2017, a common view among market commentators was that the financial markets would not repeat their strong returns from 2016 (12-17%). The problems mentioned included political turmoil in the US, Brexit, conflicts in the Middle East, North Korea's weapons buildup, Chinese debt, etc.
But global stock markets defied predictions, even though all those problems persisted. Major stock indices in the US and other countries posted strong returns for the year. Stock market volatility was at historic lows.
Important trends included:
- Solid returns for US stock indexes, but even better returns for international stocks.
- Positive returns for most bond indexes.
- Historically low volatility for US stocks.
- Little reaction by US stock markets to political and economic uncertainties.
- Continuing growth in the US and international economies.
- Faster-than-expected growth in corporate earnings.
- Continued low interest rates and low inflation.
Returns were excellent in most market sectors.
According to the Wall Street Journal, "The S&P 500's 0.4% rise on Thursday [January 4, 2018] put the broader index over the top for its own milestone, making it the greatest bull market run in the post-War era."
The not-so-good news is that we are overdue for major and even minor stock market declines. Based upon historical averages, the stock market declined 5% three times per year and more than 20% every 3.5 years. At this point, there has been no 5% decline in more than a year and no 20% or greater decline in almost 9 years. Also, price/earnings ratios are high.
Bond prices are also at historic highs and have been for some time. That is why interest rates are low. [The relationship between bond prices and interest rates is discussed here.]
Past performance is no guarantee of future performance. The stock and bond markets could begin declining tomorrow or not for years into the future. We don't know.
My approach is to deal with what has happened and not what I or market commentators think will happen. Attempting to predict markets requires investors to not only accurately forecast future events, but also predict how markets will react to those events.
Market timing (selling in advance of a market decline and buying back in before stocks recover) requires two difficult forecasts: when is the market going to decline, and when will it start going back up. No forecaster has a consistently good record predicting either event. It also requires the nerves to buy stocks when the market is crashing and other investors are selling.
Therefore, I use diversification and discipline rather than predictions and market timing. Instead of making predictions about future events, I help my investment clients choose an allocation between stocks and bonds and maintain it.
"Maintain" as in:
- Sell stock investments (individual stocks, mutual funds and ETFs) when prices are so high that the stock/bond allocation is overweight stocks. Then use the proceeds to buy bond investments.
- When stocks decline to the point that the allocation is underweight stocks, sell bond investments and use the proceeds to buy stocks.
That means selling high and buying low. Sounds like a reasonable strategy to me.
This is for educational purposes only. To learn more about the topics mentioned and if they are suitable for you, consult an appropriate professional. Tax laws can change at any time.
Any information provided in this presentation has been prepared from sources believed to be reliable, but is not guaranteed and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for information purposes only and does not constitute a recommendation.
Arthur Stein and Arthur Stein Financial, LLC are not authorized to give legal or tax advice. For information on your specific situation, please consult your tax advisor regarding any tax implications and your attorney for legal implications. As required by the US Treasury Regulations, you should be aware that this presentation is not intended to be used and it cannot be used for the purposes of avoiding penalties under federal tax laws.
Keep in mind that:
- Past performance is no guarantee of future performance;
- Investments involve the risk of loss of principal and earnings;
- ETFs, mutual funds, money market funds, etc. are not guaranteed by the US Government, the FDIC, a bank or anyone else.
- "Average annual return" evens out variations in the actual year-to-year returns.
- ETFs, mutual funds and individual stocks and bonds fluctuate in value and there will always be times when they lose value.
- None of the information provided is necessarily relevant to anyone's personal situation. Circumstances differ among individuals and they should not assume that these generalizations or information apply to them.
- Investments mentioned may not be suitable for all investors.