Low unemployment, moderate inflation, and strong corporate earnings should add up to big stock market gains, right? Not in 2018. Despite a strong +25-30% increase in estimated corporate earnings during 2018, the S&P 500 index ending up in the red. What gives? There are numerous possible explanations:
- Political Environment is Unusually Difficult: Government shutdowns and a trade war with China seem to dominate the headlines. Many thought it would not get to this point, but a resolution would largely be greeted with relief. However, is there more drama to come?
- Good News Already Priced Into Valuations: One of the most famous Wall Street saws is “the market always anticipates” the future. If you believe the prior axiom, 2018 earnings should have started being reflected in 2017 stock prices. Indeed, they were, with stock prices increasing an average of 19-20% during 2017.
- Muted 2019 Economic Prospects? After the tax overhaul and deficit stimulus spending, some analysts think the “sugar high” won’t last in 2019. Yet, according to S&P Dow Jones, analysts have dropped estimates on 2019 earnings growth from 10-11% in November 2018 to 5-6% in January 2019.
- Rising Interest Rates? After a long period of providing financial liquidity and keeping interest rates low, the US Federal Reserve has expressed interest in “normalizing” interest rates. Most people interpret this as a slow and gradual move to raise interest rates. However, such moves can send jitters through the capital markets.
- Less Sanguine Long-Term Outlook for Financial Assets: Several well-respected stock market thinkers have begun to lower expectations for long-term returns. In October, Vanguard Founder John Bogle (who died recently week at 89) made one of his last major prognostications last fall: stocks will have an annual return of only 4.0% over the next decade. He forecast bonds will earn 3.5% per year over the same period. Similarly, JP Morgan now estimates in their annual Long-Term Capital Market Assumptions report that long-term equity returns would be between 4-6%, a level not sufficiently high for many investors.
The Take Away
Since the stock market low of 677 in 2009, the Dow Jones has risen approximately 294% to 2670 (1-18-19). Continuing at this rate of appreciation would be unprecedented, and therefore, in our eyes, is likely unsustainable. As such, investors should take note of what is going on in the capital markets today and pro-actively adjust their financial planning to plan for tomorrow. We advise everyone to have a long-term plan and to stick with it, as it will reduce your financial anxiety and may make you a fearless investor.
If you are interested in getting a free consultation on the current risk level of your portfolio, schedule a quick 15-minute meeting with me, using this scheduling link, to discuss what may be some solutions.
Financial Planning. “Bogle has a dour view on stocks, bonds. What if he’s right?” Allan S. Roth. https://www.financial-planning.com/opinion/jack-bogle-forecasts-lower-stock-and-bond-returns?utm_campaign=Nov%2029%202018-daily&utm_medium=email&utm_source=newsletter&eid=eb2d250596bc4c51adcd15b5e598d2c9
JP Morgan. “2019 Long-Term Capital Market Assumptions”. JP Morgan Asset Management. https://www.jpmorganam.com.au/MI/LTCMA_2019_EXECUTIVE_SUMMARY_USL.pdf
S&P Dow Jones Indices. “S&P 500 Index Earnings”. https://us.spindices.com/indices/equity/sp-500