Stock market ups and downs: Investing in volatile times
It's hard to believe this is still the same month that saw the Dow's last record high. Since Oct. 3, however, the blue-chip 30-stock index has declined 9 percent, close to that 10 percent drop that's called a correction. Both the Dow and the broad-market S&P 500 are negative for the year.
After the relatively calm and steadily rising stock market rise most investors have enjoyed over the last several years, it's not hard to feel nervous about the sudden reversal and how it has affected your investments. And with all the recent volatility, it's natural to feel skeptical about investing in stocks, especially among retirees who need to live on their investments.
Reports from 401(k) phone centers describe many individuals leaving their existing balances where they are in hopes that stocks will come back, but they're investing new contributions in money market and stable value funds, the safest investment options. Also unsettling is Vanguard warning of worsening odds for the U.S. economy and markets, raising their forecast of the chances of recession by late 2020 to 30 percent to 40 percent, the firm's highest-ever estimate for that time frame.
Here are a few observations to help investors make some sense of the current mayhem:
Mixed signals for the rest of 2018
President Donald Trump's aggressive trade policy is contributing to the market's spiking volatility, even though U.S. economic growth is stronger, with third-quarter GDP at 3.5 percent, and continuing to gain momentum. Unemployment is at a 49-year low, and business and consumer confidence are at high levels.
But because of this, the Federal Reserve has stuck to its policy of raising interest rates to try heading off an overheating of the economy and to get rates back to historically normal levels. The problem is neither the Fed nor the markets really know where "normal" is and how many more times the Fed will have to increase interest rates to get there.
Still, the U.S. economy looks strong overall, and stocks rarely go into a sustained bear market when no economic numbers are failing. If trade and tariff matters are resolved and trade uncertainties abate, this could give markets a boost.
However, clouding up things even more, housing activity in terms of sales of new and existing homes has continued to slow. This probably isn't a harbinger of a recession but is more likely due to higher mortgage interest rates, changing demographics and the new deduction limits on state and local real estate taxes in the GOP income tax cuts that started this year.
Looking out to 2019 and 2020
If Congress makes no other economically stimulative policy changes, at some point the gravitational force of higher interest rates and the fading impact of the GOP tax cuts will create a force too powerful for the growing economy to overcome. Some numbers will begin showing signs of a slowdown, and perhaps by the end of 2019, or mid-2020, the economy could dip into a recession.
But remember that stock prices typically begin dropping well before the data shows the economy has dipped into a recession.
What should you do?
If you're a long-term investor, stick to your plan, and take advantage of the market swings by investing regularly. Also keep contributing to retirement accounts and other forms of long-term savings. Remember, over longer periods of time, returns on stocks beat the returns on bonds and cash by a wide margin.
But what if at some point during the next couple of years you anticipate a change in your financial situation, such as changing your job, which may result in less income and a need to withdraw money from your portfolio? If that's the case, it may make sense to reduce your allocation to stocks (to reduce risk) and increase your allocation to bonds (to increase income).