Five Reasons Investors are Currently Concerned
Despite stocks being within the range of record highs and being in the midst of the longest economic expansion in U.S. history, investors are feeling uneasy.
We see five developments happening today, including the trade war between the U.S. and China, that may be the cause of your concerns. Curious how these issues impact your investments and what actions you should take? Below are practical recommendations to consider regarding your portfolio.
Reason #1: U.S. stocks dramatically outperformed, but how long can it last?
Your portfolio likely has a sensible allocation to U.S. stocks but considering dramatic outperformance over the recent past, you wish you owned even more. Still, prudent investors have at least some concern over the length of this bull market and just how meaningfully a pullback would impact returns.
Reason #2: Bonds and interest rates look rather wonky.
Several factors in today’s bond and interest rate markets seem curious, but the following two stand out in perplexing investors:
- Negative bond yields. About half of global government bonds now yield less than 1%, and many carry negative returns!
2. Risky bonds in demand. It wasn’t that long ago that investors shunned bonds issued by Greece and Italy. Now, buyers appear enthusiastic about them as illustrated by recent government debt auctions.[i] Cravings for yield recently led to an auction of Greek seven-year notes being oversubscribed fourfold. More proof of a potentially harmful appetite for risky bonds comes from investors pumping $11 billion into high-yield muni bond funds through mid-year, the biggest inflows in nearly 30 years according to Refinitiv[ii]. That is incredible demand for bonds that some deemed taboo just a short time ago.
Reason #3: CFOs are leaving.
While not proven as an indicator for future stock returns, it is concerning that finance chiefs are retiring at the fastest pace seen in more than a decade. Some are simply reaching retirement age, and others are the “odd accountant out” after a merger. But does the number of departures indicate trouble?
Duke University’s Campbell Harvey said in a recent Wall Street Journal article: “It’s an intriguing market timing signal by people that are well able to assess the pulse and direction of the U.S. economy. These executives are sitting on a pile of stock and it’s difficult to sell that stock as an insider, so when do you
want to retire? Do you want to retire when the stock market is near an all-time high, or do you want to retire in the depths of the inevitable correction that might be a recession?”[iii]
Reason #4: Trade wars are impacting global growth — and currency battles aren’t helping.
Investors expected trade wars to impact the U.S. and China, but recent data show evidence of collateral damage. Europe has been affected and recently responded with fiscal stimulus. The World Bank expects global growth to slow to just 2.6% this year. Their Global Outlook Report states that “risks are firmly on the downside, in part reflecting the possibility of a further escalation of trade tensions.”[vi]
Reason #5: Investors forgot that medicine (stimulus) is used when something is wrong.
It’s a bit odd that investors enthusiastically embrace any talk of lower interest rates or other stimulus. They seemingly have forgotten that like medicine, stimulus is introduced to cure a condition. Yes, anything that jolts the economy might feel good. But have investors overlooked a slowing economy or some other ailment that required the need for stimulus in the first place?
What Should an Investor Do?
These are just five reasons for concern; in reality, there are many more. However, there are also several positives to consider, including historically low unemployment and interest rates, the fact that the stocks often perform well heading into election years, amazingly robust earnings for tech companies, strong consumer spending and more.
If you want actionable recommendations that may help better manage your portfolio, consider these points:
- Know that it’s not a matter of if but rather when the next market decline and economic recession will occur.
- An abundance of research suggests that market timing, including attempting to sell at the top and repurchase after a pullback, is a losing proposition.
- Can you think of a time when clarifying your risk and return objectives was more important than now?
- Can you think of a time when broad, thoughtful diversification was more important than now?
- Adopt the 20% haircut approach to your portfolio. Assume your portfolio could be worth 20% less at any time. How does that impact your plans or your spending?
It makes sense that investors may be feeling good right now, given the length of this economic expansion. But it’s also understandable that most feel a bit uneasy given what is happening in the markets and the world today.
Unfortunately, no one can precisely predict the next downturn. And, stocks may forge ahead for some time. The wise approach would be to examine your investment strategy — in almost clinical fashion — and ensure it aligns with your specific objectives and goals.
If you have concerns about your portfolio, contact an advisor at Fi3 for assistance.
Note: Information has been obtained from a variety of sources believed to be reliable though not independently verified. Any forecast represents future expectations, and actual returns, volatilities and correlations will differ from forecasts. Past performance does not indicate future performance. This article does not represent a specific investment recommendation. Please consult with your advisor, attorney and accounting, as appropriate, regarding specific advice.
[i] Wall Street Journal – July 17, 2019
[ii] Wall Street Journal – July 24, 2019
[iii] Wall Street Journal – July 17, 2019
[vi] World Bank, Global Economic Prospects: Heightened Tensions, Subdued Investments