December 2015 Monthly Insight: The Clouds Part

Posted By T. Lee Sherbakoff, CPA/PFS, CFP® on Dec 15, 2015


Bernard Baruch is not a household name, so a quick background is in order. He was a financier, a stock investor, a philanthropist, and an economic advisor to Presidents Woodrow Wilson and Franklin Roosevelt.  Baruch once quipped, “The main purpose of the stock market is to make fools of as many men as possible.”

While he earned his fortune in an earlier period, few today can consistently amass wealth by trying to time the market’s ups and downs. Or, for that matter, ride a few hot stocks and cash in at the right time.  So from that vantage point, we would agree with Baruch. However, a long-term investment strategy that places cash in multiple sectors of the U.S. and global economy has historically paid handsome dividends and easily outpaced what might be earned by stashing your money in a CD.

That brings us to the current day. We have seen an interesting turn of events for the market, one that favored the bulls and rewarded those who did not abandon the strategies we recommend.  But as we’ll point out shortly, reputation and reality do not always mesh.

Investors had gotten used to the relatively tranquil seas of the last four years, which passed without a 10% correction in the broad-based S&P 500 Index. But August and September were a blunt reminder that stocks will correct, and sometimes violently.  Nevertheless, basic fundamentals that fueled the bullish run remain in place, including a modest economic recovery and rock-bottom interest rates.  Despite a slight downturn in corporate profits, which can be blamed on weakness in the energy sector (FactSet), investors are anticipating a resumption of earnings growth in 2016.  We believe that helped limit the downside.

Since it’s impossible to time the market accurately and consistently, we stress the importance of a consistent and well-crafted financial plan.  Yes, there are those who claim they have a method to time the market, but forecasting the future involves two key components: perfect information and the right equation to input such perfect information. Neither exist, and there are always the unknown events that can derail even the best models.  As Yogi Berra once said, “It’s tough to make predictions, especially about the future.”

Looking Ahead and Possible Volatility

There are several variables that may affect equities in the short term and create some volatility heading into the end of the year. Let’s take a look at one.  The on-again, off-again rate hike by the Federal Reserve may be on again following the October meeting.

The Fed left a December rate hike on the table (no surprise).  The Fed’s statement explicitly said the December meeting might bring about “liftoff,” the term analysts use to describe the first in what is eventually expected to be series Fed Funds rate increases.  What makes that more significant? It’s the first time the Fed specifically referenced an upcoming meeting.  Besides emphasizing that December is still in play, central bankers wanted to prep investors who were growing complacent and had downplayed such a possibility.  Fed officials are now crossing their fingers, hoping the economy cooperates and unexpected global turbulence doesn’t resurface.

What Does it Mean for Investors? Focus Longer Term.

We suspect that if rate-hike talk increases over the next few weeks, we are likely to see additional volatility, as the first move in almost ten years has enormous symbolic significance. But it is just that – symbolic.  Five years from now, will it really matter if the Fed moved in December versus say in September? Unlikely.  There have been four Fed tightening cycles over the last 20 years.  Though conventional wisdom suggests higher interest rates hamper equities, the S&P 500 Index managed to rise in three of the four cycles.  The aggressive series of increases in 1994, which lasted about a year, only modestly blunted bullish enthusiasm.

The reality is that short-term rates will probably remain near rock bottom levels well after the Fed gradually begins to raise interest rates. If we throw modest economic growth into the mix, we’ve created two strong tailwinds for stocks – economic growth, which supports profits, and low interest rates, which reduce competition for stocks.

The Bottom Line

We believe Warren Buffett summed it up better when he said, “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”  Of course we don’t want to see the stock market close for any extended period of time. What the legendary Buffet is saying is that he maintains a very long-term time horizon. It’s something that we have consistently counseled.

August and September reminded us that stocks will go through rough patches in the short term.  We haven’t experienced a bear market – 20% drop or more – since 2008. The bear will growl again. It’s inevitable. If 200 years of history are a good guide, markets will exit the bear market and soar to new highs. That’s an important lesson to remember when gloom hangs over investors.

But many of you have different goals; therefore, our team recommends specific portfolios that take into account various factors.  For example, conservative investors aren’t fully exposed to the volatility and potential downside, while long-term investors have a much longer time horizon that allows them to ride out downturns.  We always emphasize that as your financial advisor, it is our job to partner with you. If you have any questions about what we’ve conveyed in this month’s message or want to discuss anything else, we’re simply a phone call away.

We trust that you have found this month’s summary to be beneficial and educational. As always, we are humbled that you have placed your trust in our firm. It is something we never take for granted.

 

DISCLOSURES: The information provided in this letter is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as investment, legal, or tax advice. The Nalls Sherbakoff Group, LLC makes no warranties with regard to the information or results obtained by third parties and its use and disclaim any liability arising out of, or reliance on the information. These indexes reflect investments for a limited period of time and do not reflect performance in different economic or market cycles and are not intended to reflect the actual outcomes of any client of The Nalls Sherbakoff Group, LLC. Past performance does not guarantee future results.