In August, the US officially marked the longest economic expansion in the nation’s history. Gross Domestic Product or GDP, has grown consistently over the past 121 months, breaking the last record which lasted from March 1991 to March 2001. [i] While the stock market experienced a great deal of volatility, the market got a boost in 2018 thanks to the corporate tax reductions from the Tax Cuts and Jobs Act of 2017. In 2019, the year-over-year corporate gains decreased, having already integrated the lower corporate tax rates, however the stock market marched on to new highs.
While the Fed consistently raised interest rates from 2015-2018, this week, the Fed cut interest rates by 0.25%, referring to the reduction as a ‘mid-cycle adjustment’ rather than a turning point in the market. Nevertheless, some tied the interest rate cut to the overhanging trade dispute between the US and China, which has negatively impacted the global market outlook. The White House announced plans to talk with Chinese officials in Washington in early September, giving the market a temporary reprieve.
Pundits point out that the US stock market’s current Price/Earnings valuation ratio (P/E) is higher than global markets. Further, current P/E ratios are also notably near historical averages seen right before the Great Depression of 1929, causing some to fear trouble ahead. However, history has shown that P/E ratios have been in these same relative measures several times historically (i.e. most of the 1990s) and there was no recession.[ii] While it is easy to make predictions, it is much harder to make accurate ones.
Very few forecast a large market downturn like what we saw in 2009, but most analysts admit the market is likely to slow or decline before another great expansionary period. While some see these financial indicators as signs to get out of the market, prudent investors anticipate ups and downs in the market and set an investment plan to weather volatility. There are still market factors that point to future growth potential. For one, the economy is strong, despite political uncertainty. Economists predict GDP will increase another 1.8% in 2019 and the unemployment rate will remain unchanged at 3.6%.[iii] Some worried investors cashed out in early 2019, only to miss out on the Dow Jones Industrial Average reaching an all-time high of 6,882 in July 2019.[iv]
Rather than cashing out your investment portfolio in fear, a sounder plan of action would be to make adjustments to overly aggressive portfolios and balance equities with a measured amount of intermediate term, high-qualify fixed income. For those nearing retirement, it may also make sense to reduce equity exposure, given your window for portfolio recover is shorter. For those with longer investment timelines, often, the safest strategy is to keep a long-term perspective, ensure your investment portfolio matches your risk tolerance and reduce unnecessary risk. If you are unsure about your current investment portfolio strategy, seek a second opinion from a trusted advisor. Keep in mind that some of the best times to get in the market is when everyone else is cashing out, and some of the most dangerous times to jump into the market is when everyone says the market is hot.