As a sharp decline in stock averages ensued in October with the “humbug’ attitude accelerating in December, it seemed the Grinch stole Christmas, at least on Wall Street. A post-Christmas Santa Claus rally brought a modicum of cheer. On the shopping streets of America, Santa’s spirit was alive and well as retail sales set records compared to 2017. It was The Tail of Two Attitudes—pessimism amongst stock traders versus confidence on the part of gift buyers.
Consumers felt flush based on the past year or so. Employment is at highs, the labor market is tight, debt to income levels are reasonable. Our economy is in good shape. But traders worry about a myriad of maybes. The Federal Reserve raising interest rates, a slowdown in home and vehicle sales, Trump tweets, tariff uncertainty, China, government deficits, corporate earnings, etc. We ended 2018 with major indexes in correction territory relative to the all-time highs of late-September and early October. A number of heavyweight stocks, especially in previously high flying tech related and e-commerce sectors, were down more than 20% from highs, a bear market move. For the year the Dow lost 5.6%; S&P 500, -6.2%; Nasdaq, -3.9%.
We have a 24/7 news cycle, with cable business news channels and internet sources having huge time blocks to fill. Sensationalism and breathless “breaking news” alerts are emotional attention getters anathema to your peace of mind. Perspective and context are antidotes to worry.
A “market correction” is a decline of 10% from a previous high point. When the drop hits 20% or more from the high, a “bear market” ensues. Corrections occur on average every one to two years, depending on how you view data. Bear market interludes occur about every three to four years, and they do not necessarily presage a recession. The bear market of the 1930s plagued investor psyches for decades. Today’s investors look to the market declines of 2007-2008 when market averages dropped by over 50%. Nervousness over a repeat of 2007-2008 is exacerbated by the large number of Baby Boomers near or in retirement as they worry about another meltdown. How should you play the possibilities?
If you’re saving for retirement, financial independence, or any long term purpose, and you have cash, when headlines are scary, buy stocks. Add to your 401(k), College Savings Plans, or other equity repositories. You will never time it so you buy at the bottom but you may feel like a genius a year or two later.
If you’re over 50 and incubating a retirement nest egg, build a Paycheck Fund. When you no longer have a paycheck from employment and are counting on savings to bolster financial freedom over and above Social Security and annuity or pension-like income if you have it, you will worry more about stock market machinations. Have enough cash and low risk and low volatility investments to provide for emergencies and your “paycheck” (monthly cash) to sustain you and your family without having to sell stocks when they are down substantially in value.
Don’t forget the importance of dividends in retirement security. As averages soared earlier in 2018, investors chased “growth,” highflying tech stocks in particular. As the tech giants crashed back to earth, investors in the 4th quarter gravitated back toward value stocks, stalwarts with good dividend yields. Some dividend payers in the Dow average were hurt, notably GE (dividend slashed) and big energy companies based on low oil prices. On December 31 the Dow average had a dividend yield of 2.43%; S&P 500, 2.15%. That’s not bad compared to the Bankrate.com 5-year CD average of 2.02%.
A solid portfolio of dividend producing stalwarts may not keep up with the indexes when animal spirits are chasing growth, but it will hold up better in downturns while producing comforting cash flow. The dividend yield increases when prices decline.
Forecasts for 2019 are all over the place. Electronic traders and computers pre-set to buy or sell are causing unprecedented volatility. You see that with surges of buying or selling just before a market close. For long term investors, ignore the noise. Have your buffers and “guardrails” in place, ample short term liquidity, a diversified portfolio, including quality stocks, a comprehensive and up-to-date peace of mind financial plan, and enjoy your year. HAPPY 2019!