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The Stock Market Rise and Subsequent Drop – Concern or Opportunity?

Mark Smith, CFP®, CPA/PFS, CIMA® - Tuesday, February 6, 2018

2018 Stock Market Volatility | M.J. Smith & AssociatesThe age-old discussion of the stock market rise and drop is something that has been analyzed and talked about for years.  And as we’ve seen in recent weeks, it has created headlines on almost all major news outlets again.

Despite some of the decline that we’ve seen this last week, the Dow Jones Industrial Average and the Standard & Poor (S&P) 500 both have reached historical numbers this year, with an overall monumental month in January. Many of the varying inclines and declines that we are seeing in the market are simply what we’ve seen for decades – the market correcting itself, interest rates changing, tax reforms effects, and more. 

 

Why This Shouldn't Scare You or Change How You're Invested

J.P. Morgan Chase recently released its Q1 2018 Market Insights Report, which highlights the S&P 500 intra-year declines versus calendar year returns.  The report – evaluating data from 1980 to 2017 – states that “over this period, the average annual return was 8.8%, and despite some average intra-year drops of 13.8%, annual returns have been positive in the 29 of 38 years.”

Feb6Graph.jpg

There’s no doubt that there will continue to be drops in the market, just as we have seen recently. But in general, there should be no cause to ‘panic’ each time this happens. Drops in the market are normal – as historical data has indicated – and it shouldn’t scare you and or change how you’ve invested.  Rather, it’s something that you should be prepared for by having a strong mix in your portfolio.

 

There is Still Positive Momentum

According to a recent article in Barron’s on Jan. 27th titled “An Investment Pro Who’s Seen It All Still Sees Upside for Stocks,” there is still positive momentum for the stock market.  The article highlights points from a recent interview with Marvin Schwartz, a renowned investor, who indicates that the stock market will continue to rise due to the following reasons:

  • Tax Reform Impact: There is very little incentive for U.S. companies to move abroad, given the new tax rate (10% on foreign earnings) is less than the new 21% U.S. rate.
  • Gross Domestic Product Expected to Grow: We’re going into a year where gross domestic product will grow 3.5% to 4%, instead of the 2% growth we’ve seen in recent years. With this type of growth, there’s no doubt that we will see capital expenditure take off in 2018 and be stronger in 2019.
  • Earnings Estimates for 2018 and 2019 are Up: When the tax reform passed, many did not think it would take effect until Jan. 1, 2019, which caused portfolio managers and analysts to not revise their 2018 earnings estimates -- until now. The consensus estimate for 2017 operating earnings was $132, up from $119 in 2016; in 2018, the consensus estimate is for $153, a 16% improvement; and for 2019, the estimate is $165, which are all positive for the stock market.
  • Companies are Putting Money to Work: Through mergers and acquisitions, capital expenditures, dividends and/or buybacks, we will see more companies put money to work. Share buybacks are expected to grow in 2018 – which is the re-acquisition by a company of its own stock and represents a more flexible way of returning money to shareholders.  Mergers and acquisitions volume should also increase, utilizing roughly $1 trillion in cash per year.  
  • Consumers will Continue to Spend More: Minimum wages are increasing, which should lead to more money to be poured into the economy. This will possibly lead to inflation and higher rates. However, it’s expected that consumer price inflation for 2018 will be 2.5% to 3%, which is still below the 50-year average of 4.1%.  Although these rates will rise, it’s unlikely they will rise to the level that could hinder expansion. As of February 2nd, 2018 the average hourly earnings for workers increased the most in January since mid-2009.

 

The stock market rally over the last few years, and subsequent drop that we have seen in the recent week, is no cause for concern at this time. There are many opportunities for investors to have a positive outlook. Certainly, it’s important to be aware of what the trends are and how this may impact markets, but perhaps the focus should be more on how this can pose a “buying” opportunity, and one that investors can optimize on when the market drops.

At M.J. Smith and Associates, we are here to help you navigate through this and prepare for the cycles of the stock market.  The market will likely continue to show an overall increase in 2018 and 2019, with probable drops along the way.  Our advice to you is to see this as an opportunity.

 

 

This information does not purport to be a complete description of the developments referred to in this material. Links are being provided for informational purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

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