For American equity investors, a bad quarter after a stellar decade

Markets have been whacked repeatedly in recent months — by a number of geopolitical and economic global and domestic instabilities.

By DAVID ZWEBNER, SELWYN GERBER

JANUARY 3, 2019 23:13

Global economic growth (photo credit: Courtesy) — Global economic growth

(photo credit: Courtesy)

From the depths of the Great Recession in March 2009 through September 2018, the shares of the 500 largest public U.S. companies grew by $18.9 trillion. In addition to the rise in stock prices, those 500 businesses delivered $3.1 trillion to their shareholders in the form of dividends. Add them up, and by the end of September 2018, the total comes to more than the entire $21.9 trillion of federal debt.

Since then investors endured a very painful 3 months, capped by a 1,000 point drop in the Dow Jones Industrial Index (DJI) in 2 days in late November – the largest point drop in the history of the DJI (although not the largest in percentage terms.) The S&P 500 has dropped around 20% from its peak wiping out over $4 trillion in value. Among the stocks most affected by this decline are the famed FAANGs — Facebook, Amazon, Apple, Netflix and Google parent company Alphabet — all of which were down more than 20% below their peaks and therefore technically in bear territory. They were the stellar performers in the runup and therefore it was to be expected that they would exhibit greater volatility in any markets declines.

“The market, like the Lord, helps those who help themselves. But, unlike the Lord, the market does not forgive those who know not what they do.” – Warren Buffett

Markets have been whacked repeatedly in recent months — by a number of geopolitical and economic global and domestic instabilities. Among the key factors are the Federal Reserve quarter-point rate hike, a roiling U.S.-China trade spat, oil prices declining because of worries about world economic growth, and, finally, closure of the government over funding for a border wall between this country and Mexico. To that one might add: Brexit or no Brexit. White House investigations. Oil prices. Growing budget deficits. Growing national debt. Trump.

While it is not easy for investors to look at the bright side, all of the fundamentals appear to be solidly intact.: Inflation is benign, interest rates are low, both corporate and individual balance sheets are strong, and the nation’s Gross Domestic Product (GDP) grew at an annualized 3.4% in the 3rd quarter. Corporate profits are 20% ahead of last year although they are not expected to continue this pace of growth in the coming year. Slowing down to solid single digits is widely expected but deceleration of growth is not the same as a recession. Recessions begin when imbalances build up in the economy over time, such as the housing bubble in 2007. The strength of the current expansion has been modest by historical standards and significant imbalances have not surfaced.

“History is solidly on the side of the bulls. Don’t mistake risk for volatility” - Jonathan Gerber of RVW Wealth LLC.

An oft-forgotten fact is that the U.S. economy is predominantly driven by consumer spending, which accounts for approximately 70 percent of all economic growth. Early reports indicate that U.S. retailers saw the strongest holiday sales increase in six years,. Total U.S. retail sales, excluding automobiles, rose 5.1% between Nov. 1 and Dec. 24 from a year earlier, according to Mastercard SpendingPulse, which tracks both online and in-store spending.

What should investors be doing now? For most, the answer is this simple: Stay the course. If the financial plan upon which your investments were made was properly prepared, volatility of this nature ought to have been incorporated into the asset allocation and anticipated. An optimally selected diverse group of stocks weighted towards the factors that have historically outperformed should withstand market corrections and recover in due course. Equity investing is a long term undertaking – and a pool of secure bonds should be used to provide any needed liquidity in the event of a severe market correction. Short and intermediate term investment grade bonds held up well this year. Paying attention to the daily headlines and market gyrations is folly and is likely to lead you to do precisely the wrong thing. We are hard-wired to be bad investors, often tempted to invest at the top and then bailing out when markets fall. The right asset allocation is balancing regret that you do not have more in equities when the market is doing well with remorse when you have too much in the equities when the market is going down.

David Zwebner is the president of Commstock Financial Consultants. Selwyn Gerber, CPA, is a founding member of RVW Wealth LLC.