Investors have been able to take a collective sigh of relief as we approach the midpoint of 2019. Remember back to last December, when almost every news headline worried that the inevitable bear market was here at last. Instead, declining stock markets bottomed out on Christmas Eve and have since rebounded with double-digit returns through mid-June.
The year got off to a hot start, thanks in large part to the Fed putting a halt on interest rate hikes, Washington “making progress” towards a trade resolution with China (cue the eye-roll), and companies reporting better than expected first quarter earnings. Through the end of April, the S&P 500 had its fourth-best start to a year on record with a gain of over 17%1 - some much happier trivia than the “worst December since the Great Depression” nugget in our last newsletter.
It hasn’t been all smooth sailing, however. The aforementioned “progress” in trade talks with China took a major step backwards in May when the United States went from being “close to a deal” to actually increasing the tariffs on $200 billion worth of Chinese goods 2. This sent a shock through the market which appeared to have been pricing in some form of trade resolution, and resulted in the S&P 500 falling 6.6% for the month3. Ouch. While the market has bounced back over the past couple of weeks and trade talks are scheduled to continue in June, we believe that the trade war remains among the biggest unknowns in this bull market. A resolution could be a catalyst for higher stock prices, but additional setbacks in these discussions could likely result in substantial downward pressure on the market.
One major takeaway from the past six months is the importance of determining a long-term investment strategy and sticking to it. In January we wrote about the difficulty of timing markets and how fleeing to cash to ride out the proverbial storm could be a costly mistake. Today our overall message remains the same, though the circumstances are different. Now that the equity markets have had a strong run to start the year, some investors may experience FOMO (“fear of missing out”) and assume more risk than they’re actually able to tolerate. These urges are natural and tough to fight, but thinking back to how you felt last December (or perhaps last month) and reevaluating the amount of risk that you’re comfortable taking should help minimize the worst of all investor behaviors: buying high and selling low. If you wish to revisit your risk exposure and verify that you have an appropriate asset allocation for your long-term financial goals, your team at Encompass stands by ready to help.
1Bespoke Investment Group 2CNBC 3YCharts