Be honest now, did you really forecast the 8-10% “Trump Bump” the stock market has experienced since the election? We didn’t think so. Neither did we, nor did virtually any other competent market prognosticator. Which of course proves once again that no one has that crystal ball that allows them to correctly forecast future market directions.
As always, in retrospect it is pretty easy to understand what is driving this domestic stock market that we keep hearing is attaining all time highs. In the words of Mohamed A. El-Elrian, Bloomberg View columnist, and excerpted in a recent issue of Wealthmanagement.com, the cause of the market increase is threefold: liquidity as a result of potential repatriation of corporate cash held abroad, growth expectations brought about by better perceived governmental policies to enhance business profitability, and inflation which will likely happen as a result of these two levers and which will drive prices and profits higher.
But if that is why the market is acting so positively, does that give us any idea how long this bull market will continue? Unfortunately the answer to that question is no, and the only strategy to follow continues to be broad diversification and careful management of expenses.
Speaking of diversification, this brings up another point worth mentioning. By definition, diversification means investing in different asset classes which don’t all move in the same direction. The result of doing so is very obvious by looking at results of our investments over the past quarter. While stocks are up (at least U.S. stocks) our investments in bonds are down. This is what we want to happen, but at times it is difficult to watch as we hear the glowing reports of stock advances but then don’t see our portfolios which contain 40%, 50% or 60% bonds growing nearly as fast as the stock market.
Furthermore, we read frequently of the danger of investing in bonds. Let’s get serious. Bonds are in the portfolio for one primary reason: to provide a cushion against stock market volatility. In other words, bonds are a stabilizing force that allow us to invest some of our funds in stocks which can provide nice growth in positive times.
Fortunately, bonds are not nearly as volatile as stocks. Also, all predictions are that rates will rise slowly enough that the corresponding downside in market prices will be minimal. We have been through similar periods in the past. For example, a Wall Street Journal Morning MoneyBeat dated December 20, 2016 points out that beginning in 1950 it took seven years for the 30 year bond yield to rise from 2.5% to 3.5%, and 10 years for it to rise to 4%. Such a gradual increase in bond yield would be very healthy and have the benefit of providing higher yielding instruments for our portfolios in the future.
Since we are quoting recent Wall Street Journal articles, let us end with a brief quote from an article published December 9, 2016, written by Jason Zweig titled, Let’s Be Honest: Are You an Investor or a Speculator? In this article Mr. Zweig gives the following answer to that question: “If you buy because you are afraid of being left behind should stocks keep booming, you are speculating. If the market’s rise makes you worry instead and look to rebalance your portfolio by selling some of what has gone up and buying some of what has gone down, you are investing.”
There is a lot of wisdom in that short summary statement, and it will serve us all well by referring to this whenever the market ups and downs get our attention.
All of us at Stratford Consulting want to wish you and yours a wonderful holiday season. We greatly enjoy helping you and your families coordinate and oversee your financial affairs, and look forward to another year together in 2017!