Global Economic Armageddon: Should You Get Out of the Market?
We live in an “OMG” world, where people have the tendency to make immediate and rash decisions based on limited information. No more is this true than in the stock market and investing world.
The market can be volatile – changing at a moment’s notice. Whether global political concerns or updated forecasts, there are many factors that can cause sudden movement in the markets. But quick decisions based on sudden changes can be costly. How can you be sure your money is safe in your investments?
Uncertainty is Investing Reality
How you handle uncertainty has a significant impact on your investing outcomes, and panic and overreaction never lead to smart decisions.
As humans, we have a standard psychological response to anxiety that stems from a fear of the unknown. We like having answers that give us a sense of certainty, even if answers are flawed. So when we read or hear an “expert” recommending you drop Stock XYZ, that answer quells our anxiety of losing our money. Moreover, when we learn of expert advice, our brains’ critical thinking engines can shut down, leaving us vulnerable to following advice that may not pertain to our individual circumstances.
How often does an event occur that’s followed by a hoard of investing “experts” sharing their opinions on news outlets? In a 24/7 news cycle, any event that may impact the market is a “story.” But more importantly, it’s a way to keep stories fresh in an industry that’s fundamentally entertainment.
Uncertainty is a foundational truth of investing. If an investment was absolutely certain,investing would be without risk and everyone would invest the same. When financial performance wanes, we tend to let negativity mount and lose sight of the long term and our thoughtful investment strategy. The reason we diversify is to limit the impact of any single negative security or event.
There are a number of recurring topics and events that are commonly discussed in relation to the stock market. How do they affect your investments?
Market Growth During Presidential Terms
Perhaps now more than ever, there is a lot of talk in Washington about the performance of the stock market. The S&P 500 continues to set new record highs. However, the S&P actually performed better in the first year of the previous two presidents’ stay in the White House.
After Presidents Trump’s inauguration, the Dow Jones rose 26%, eclipsing 25,000. But over the same timeframe during the beginning of the Obama presidency, the Dow rose 33% to a nominal 10,572. In fact, from the depths of the recession, the Dow grew more than 60% over the same 10-month time period. Presidents Obama, Clinton and Reagan even held eight-year terms in which the stock market grew by triple digits.
Alas, reporting that paints the current market conditions as better than ever is misleading and can lead to misinformed decision making.
The Effect of Tax Rates on Market Returns
When tax cuts are rumored or announced, investors tend to become more optimistic based on hope that lower tax rates will encourage more consumer spending and business investment. Lower taxes mean more expendable income for individuals and businesses. But the following Bloomberg chart depicts a different reality:
In the 1930s, corporate taxes were less than half the rate they are today, and less than a third of their height in the 50s and 60s.Yet the S&P yielded negative returns. Then, as businesses were taxed higher rates in the 40s and 50s, stocks performed well.
With the reported aim of corporate tax cuts from the current 35% rate to 15%, businesses could reap higher profits. Will this lead to even stronger growth in the markets? Will tax reform inspire businesses to invest more money in people, plants, equipment, and other areas that can promote economic prosperity?
How tax cuts are financed can influence the long-term market growth. If subsequent cuts to unproductive government spending finance tax cuts, markets could perform better. If tax cuts are supported by increased government borrowing, it could likely hinder the long-term performance of the stock market. Tax cuts financed by reduced government investment could also lead to market decline.
Simply put, reports of tax reform shouldn’t cause you to diverge from your investment strategy. Nor should a theoretical tax increase compel you to get out of the market. Despite what any investing guru may say, the uncertain future of the stock market and tax cuts is not a signal to adjust your investment portfolio.
The Decline Following Market Growth
As we discussed in a recent blog, several investment firms have presented market signals suggesting that the global economy is in the final stage of its growth, with a market downturn looming this year. Some of those analysts have cited investors’ disregard for key valuation fundamentals and data.
In our blog we reported, “The major sign of decline typically starts when equity environments and the major indices push toward new highs, but market behaviors are indicative of shifting investor preferences – away from growth speculation and toward risk-aversion. Generally speaking, these market indicators depict much greater disparity between the best- and worst-performing stocks.”
These indicators were present before the dot-com crash and Great Recession, and last in November 2017. Yet, the Dow Jones has grown more than 1.5% from December 2017 through the middle of March 2018. Does this mean the predicted market decline is not coming? Has it yet to initiate? There may be varying opinions that fall under the designation of an “OMG” reaction, but don’t let the uncertainty harm your investment strategy or lead you to make rash decisions.
When Should You Get Out of the Market?
Especially when negativity runs rampant on financial media outlets, it may be hard to stick to your strategy – It’s human nature after all. But you have to avoid succumbing to supposed expert advice during market difficulties. There are many scenarios that could play out in the future, and you need to assess the risks and opportunities of shifting your investments.
Your most strategic move is almost never taking all of your money out of your portfolio. Fear can destroy wealth. Instead, you must focus on what you are able to control. First, make sure your portfolio is globally diversified. Then work with your advisor to rebalance your investments on a regular basis.
Want to learn more about properly managing investing uncertainty?
Register to attend “OMG Global Financial Economic Armageddon” on Wednesday, April 18, 2018 10:30—11:30am, Atrium Meeting Space, 100 Great Meadow Rd., Wethersfield, CT or 6:30—7:30pm, Hammond Iles Learning Center, 102 Halls Rd., Old Lyme, CT
Just email firstname.lastname@example.org or call (800) 416-1655 to reserve your spot.
See details and schedule of investor education classes here.
About Greg Hammond, CFP®, CPA
Greg Hammond is the chief executive officer of Hammond Iles Wealth Advisors, and co-founder of Planned Giving Strategies®. Greg leads a team of professional financial advisors providing customized wealth management and investment solutions for high-net-worth individuals, families, companies, and charitable organizations across the U.S.