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Stock Market Outlook: The Year That’s Testing Investors

It’s been a challenging year for investors in the stock market, and the fate of 2018's performance will depend on December.
Nov. 30, 2018
Investing, Investing Data, Investing Strategy, Investments
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For U.S. stocks, 2018 will go down as unusually volatile, with investors enduring not one, but two corrections — declines of at least 10% from a recent high. Unknowns remain, including whether the S&P 500 can hold on to year-to-date gains in December’s 20 trading days.

The challenges for investors don’t stop with stocks. Bonds, gold and oil are among the assets down this year; in fact, 90% of the 70 asset classes tracked by Deutsche Bank were posting negative total returns in dollar terms through mid-November, according to The Wall Street Journal. There hasn’t been this much red for investors in nearly 100 years.

November brought additional pain, with the S&P 500 succumbing to a second calendar-year correction, something that hasn’t happened since 1990, according to data from Yardeni Research. Meanwhile, once-mighty tech stocks (the so-called FAANG group of Facebook, Apple, Amazon, Netflix and Google parent Alphabet) all slumped into bear markets, or declines in excess of 20% from recent highs. 

» How to deal: What to do before and during a market crash

That said, the market bounced back to end the month 1.8% higher.

Another glimmer of hope? December historically is the second-strongest month of the year, with average returns of 1.4%, and has ended higher 66 of the past 90 years, according to Yardeni Research. Whether that trend holds will depend largely on news from the Federal Reserve and President Donald Trump. Here’s what two professional investors, with different perspectives, will watch in December.

There’s more room to run

Central bankers convene eight times a year, and each meeting is as closely watched on Wall Street as pick-your-favorite-televised-event. December’s will be a must-watch, too. Why? Many people (including President Trump) blame the Fed for raising rates too quickly and causing market volatility.

Investors generally expect the Federal Reserve Open Market Committee, which sets a target for interest rates, to raise rates for the fourth time this year at its Dec. 18-19 meeting. Such an increase — and what policymakers signal for 2019 — could fuel further market turmoil.

Don’t make your own recession by not investing in the market.

Joe Mallen, chief investment officer at Helios Quantitative Research

“All eyes will be on the meeting,” says Joe Mallen, chief investment officer at Helios Quantitative Research. While Mallen anticipates the Fed will raise rates, he hopes its rhetoric — including a scheduled news conference with Chairman Jerome Powell — will be “dovish” in tone, or less aggressive about the number of rate increases ahead. That would help to reinforce recent comments Powell made that interest rates “remain just below the broad range of estimates of the level that would be neutral for the economy” — a message that was well-received by market participants.

Still, some investors remain on edge, especially amid a flurry of predictions that the next recession is coming in 2020. Mallen, for one, doesn’t see signs a recession is as imminent as that, and believes the market will see further gains ahead.

Hiring in October was more robust than it’s been, on average, in the prior 12 months, while consumer sentiment remains near record high levels. “The U.S. economy still is healthy,” he says. “Is it plateauing? Sure, but it’s not tumbling downwards.”

What to do now: If you remain optimistic about U.S. economic growth, market volatility serves as an opportunity to buy stocks at lower prices. Consider reshuffling your portfolio, buying stocks that move with the overall economy, or selling losing investments to offset gains (what’s known as tax-loss harvesting). Mallen says: “Don’t make your own recession by not investing in the market.”

» Dive back in: Buy the dip in stocks

Approaching the top of the cycle?

Nearly 10 years into the current bull-market rally, some investors question whether the market’s nearing the end of its cycle — meaning performance will weaken ahead. Signs of slower global growth adds to concerns, as does an ongoing trade dispute between the world’s two largest economies.

Ben Phillips, chief investment officer of EventShares, believes the market is approaching that top — and trade is his chief concern.

U.S. investors have already felt the pain. The ongoing trade disputes with China have created supply-chain disruptions, affecting corporate profitability and stock performance, which have a spillover effect on the broader U.S. stock market, Phillips says.

Investors will await “any tangible signs of change” in the wake of a planned meeting between President Trump and Chinese President Xi Jinping at the G-20 summit in Argentina, Phillips says. But he calls significant change unlikely given that tariffs the U.S. imposed earlier this year didn’t achieve U.S. goals for changes to China’s trade policies. Thawing tensions would be “positive for global growth, but I think that’s a really low probability,” he adds.

You need to understand what you’re buying.

Ben Phillips, chief investment officer of EventShares

What to do: Don’t sell out of fear; rather, be more selective about how you invest. If you believe the current market cycle is nearing its end, consider those dynamics when making allocation decisions. Diversify your portfolio to include sectors that still have solid growth prospects (like health care), read research reports from fund managers or talk to a financial advisor, Phillips says: “You need to understand what you’re buying.”

» Read more: How to research stocks

Stock market forecast

Given the market’s wild swings in recent months, it’s no surprise that many investors worry about a more prolonged and severe market sell-off ahead. Such sentiment is reflected by both professional and individual investors:

  • The percentage of retail investors who expect stock prices will be lower in the next six months jumped to more than 47% in mid-November. That was the most bearish reading since February 2016, according to a weekly sentiment survey conducted by the American Association of Individual Investors — but that share dropped to less than 40% by month’s end.
  • The bull market in global stocks has already ended, according to 35% of respondents in a recent Reuters poll of 100 equity strategists. Still, some 48% believe it has more than a year of life left in it.  

While there’s no “right” time to buy into the market, now may feel like the wrong time to do so. But it’s best to fight those fears and keep investing. With the vast majority of asset classes in the red this year, you don’t have a lot of attractive alternatives for investing in 2018, so it’s prudent to bet on the stock market’s proven history as a long-term investment.

While there’s no ‘right’ time to buy into the market, now may feel like the wrong time to do so. But it’s best to fight those fears and keep investing.

Not sure you can stomach such volatility alone? Consider working with a financial advisor — either of the human or robo variety. (Read more about how to choose an advisor.)

Keep these simple mantras in mind when investing for the long-term:

  1. Volatility is inherent to investing. Take that as a given and don’t stress about daily gyrations.
  2. Don’t try to time the market. If you sell when you think the market’s peaked you’ll likely be wrong.
  3. Keep adding money to the market at regular intervals. This strategy, known as dollar-cost averaging, smooths out your purchase price over time.
  4. Diversify your portfolio to reduce overall risk. That means a mix of stocks and bonds, as well as assets from different geographic regions.

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