After strong investment results in 2017, many investors have been convinced that the current nine-year bull market in large cap US stocks is nearing an end. They believe the risks, both economic and political, outweigh the potential opportunities. For some, the first six months of 2018 have reinforced this belief. Stock price volatility has increased significantly, as daily price swings of more than 1% have been common in 2018 after historically low volatility in 2017. The US Federal Reserve Bank has increased the Fed Funds rate twice by a total of 0.50% in an effort to fight expected future inflation. And global trade worries are growing as the US threatens to increase tariffs on trade with both our allies and adversaries.
And yet, investment results for the first six months of 2018 have been pretty flat. Despite the volatility, most investment accounts are up slightly year-to-date. US stocks have gained a bit, foreign stocks have dropped some and bond prices on average are down a little. Investors may be nervous and negative news is plentiful, but investment values have held fairly steady. In this market environment, you might think it is a good time to be more cautious and focus on investment fundamentals.
Increasing your allocation to bonds can be a good strategy to reduce portfolio volatility and protect your account value. Shifting assets to stocks with low price/earnings ratios and solid dividends, and avoiding high flying growth stocks, should reduce portfolio value fluctuations. But for the last six months taking a more conservative approach most likely would have resulted in lower investment returns and possible losses. US government bonds values have declined more than corporate bonds. High flying growth stocks like Facebook and Amazon have provided most of the investment gains in 2018. While foreign stocks appear to be undervalued relative to US stocks, the US market has been more stable and provided incremental gains versus losses for more attractively valued foreign markets.
Looking forward to the second half of 2018, this paradox of investment results may continue. US and global economic growth remains strong. Exports of US products to other countries reached an all-time high in April, despite the less-than-cordial G7 economic summit. While inflation remains low, the Fed is projecting two more interest rate hikes this year. And as the countdown to the mid-term US elections approaches, investors remain nervous about political news and global events.
We don’t know how the election will turn out, but that does not mean we should alter our investment strategy due to that uncertainty. Each of us has our own personal financial plan, and we should stick with our investment strategy regardless of market ambiguity and election results. Making investment predictions is difficult and often the conventional wisdom about reducing risk and protecting our account values during periods of volatility and uncertainty turns out to be the wrong move.
This article was authored by Christopher Borden, CRPS®, a financial advisor located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or [email protected]
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Talk to your financial advisor before making any investing decisions.
©2018 Canby Financial Advisors