What is going on in the stock market? Losses Nov. 20 wiped out all of the gains for 2018. This volatility started in early October. It is a shock compared with last year, when there was almost no volatility.
Market growth over the past couple of years has been more concentrated in a few stocks. The so-called FAANG stocks –- Facebook, Apple, Amazon, Netflix and Google – have produced much of the overall market gain. These stocks, however. have been experiencing problems that have knocked them into correction territory. A correction is considered a loss of at least 20 percent from a particular stock’s high.
Facebook has been laboring over privacy issues and Russian influence during the presidential election. There is a concern that Apple IPhone sales are slowing down. The company’s recent announcement that they would stop reporting unit sales has not been well received.
There are other areas of financial concern. Brexit has re-entered the conversation. This is the plan for Great Britain to leave the European Union. When it voted to do so a couple of years ago, the stock market went down 900 points in three days.
It bounced back the next three days when people realized that this change would take some time to happen. This is starting to happen now, and it could cause many problems in the European economy.
There is a lot of fear about what could happen if we get in a major trade war with China. We are slapping tariffs on each other at a pace not witnessed in a long time. There is potential for something to go wrong, which could lead to increased inflation, which would prompt the Fed to raise interest rates at a quicker pace.
The Fed has been raising interest rates on a regular basis over the past two years, something it must do to control inflation. Higher rates make it more expensive for consumers to make major purchases, such as homes and autos.
This causes manufacturers to produce less and realize a reduction in their profits. That situation also makes it more expensive for companies to borrow low-cost money to buy back their own share of stock. This practice has been a major driver of stock market growth.
Rising interest rates also give investors more options on where to invest, because bonds will be paying a higher interest rate. This will lessen the demand for stocks, and because the stock market is the world’s biggest auction, valuations probably will be lower.
The economy, overall, is as strong as it has been in many years. Unemployment is at a low not seen in almost five decades. Company profits have been coming in above expectation for the third quarter. With 91 percent of the Standard & Poor’s 500 reporting so far, 78 percent of the companies have beaten analyst forecast.
The market is fully priced, so it would not take much to topple it. An important thing to consider is the timing of your market investments. If you will need the money in the next few years, it probably should not be in the market. If you have a long enough timeline, the market could produce some of the best results.
The worst thing that can happen is to have a major correction right before or after starting retirement. This is when sequential risk could wipe out your portfolio. Make sure that your risk matches your needs.
There will be a big correction sometime. Whether this is the beginning or not, no one knows for sure. No one can time the market, and every downturn does not represent a buying opportunity, as some on television would try to persuade you.
Be realistic and careful. Do not let a major market downturn interrupt your retirement by requiring you to get a job.
Gary Boatman is a Monessen-based certified financial planner and author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”