The first half of 2019 has brought anything but calm and clear waters, but both stocks and bonds have navigated all the big waves that have come pretty nicely so far.
We started 2019 with a bit of a hangover from the previous quarter, the way some people wake up on New Year’s Day, but the new year also brought the promise of a rebound. The bears were still out in full force, with many advisors telling us to be careful and some even cautioning us to get out of the stock market now before the real storm comes.
Wise investors don’t take such drastic moves very lightly though, and we at least need to see the bear market or the recession that many predicted at least coming to pass before we move out of all of our stocks like some were recommending. Investors tend to err on the other side of things, and are prone to hanging on way too long, and certainly aren’t likely to panic based upon what amounts to some whispering of what might pass based upon some reasoning that may at least be questionable.
The word “might” is the key word here, and we really don’t want to be deciding these things based on what might happen, as it may or may not and if it doesn’t, it’s a mistake. This isn’t even a matter of which scenario is more likely than not based upon the information we have, as even if a down year is more likely than not, it still can be wise to hold on and wait and generally it is.
The fundamental mistake that these prognosticators of doom make is to see the situation as an all-or-nothing thing, where we either commit to any losses that may come our way or step aside now to avoid this. Even if we know that there is a 75% chance that stocks will give back 30% this year and only a 25% chance that it will gain 30%, this doesn’t mean that we should allow this to scare us enough to flee the stock market.
By saying yes for now, yes to the present in other words as long as the present looks fairly good, we can wait for the situation to clarify itself more. Just because some people stick to their guns and ride any bear market down all the way does not mean that we have to, and if we are so eager to jump the line that we’re selling out on rumors of a possible bear market, we can also just back off on our exit threshold without exposing ourselves to too much risk.
The middle ground is often the best path and we neither want to be too hasty or too slow to react, and we especially do not want to become so slow that we just refuse to act at all. Even those who fled their stocks last October wouldn’t have seen anything resembling that sort of concern this year, and this may not happen in the second half of the year either.
When the Actual Bear Market Comes, We Won’t Have to Guess
If such a thing does happen though, it will make its presence known. It is always wise when you are holding stock positions to keep a close eye on the Fed, and while many do, and this all gets tons of coverage in the media, the great majority of investors simply do not pay attention to this or anything really, until they give back so much after the fire has already consumed a large portion of their portfolio value that they finally feel the pain and finally start considering a different course of action than doing nothing and hoping.
Watching the Fed can be of great benefit if we are instead looking to time our stock positions, as we should be, and taking action based upon significant course changes in monetary policy can in itself be a simple and pretty effective means to manage your portfolio.
2018 wasn’t a particularly good year for stocks in spite of our remaining in an overall bull trend, and we only need to look to the actions of the Fed on interest rates to explain it. Last year, the Fed not only raised rates, which dampened the enthusiasm of the stock market, they forecasted even more rate hikes last October, which really set stocks reeling.
It didn’t matter if the company that you owned stock in was doing fabulously. Interest rates do trump business performance, and we saw plenty of companies who had their best year ever last year see their stocks decline, and it was this concern about interest rates that precipitated this ultimately.
Once the Fed told us that they would be lightening up and practicing more patience, which was the message we got to start the current year, things turned around. It didn’t even seem to matter what else was going on, whether it be that the economy is slowing or tariffs were increasing, as the expectations of a friendlier approach to interest rates is the antidote to just about everything, including all of the concerns that we’ve faced in 2019.
We even reached a point where news which clearly would be bad was seen as a positive, like the threat of potentially destructive tariffs on Mexican imports causing a rally due to the perception that this would make an interest rate cut more likely. This in itself speaks very loudly to how near and dear interest rates are to the stock market.
What the Market Cares About, We Need to Care About
There are a number of things that we could look at when we seek to predict how the second half of this year will go for the stock market, with various levels of confidence. With some things such as the progress of trade talks with China, we’re left to guess as to how much longer this will last or whether things will get worse before they get better.
As far as the economy goes, we know that growth has been declining and will continue to, and we can be fairly confident about the numbers we have, but these things can change unexpectedly. Keep in mind that last October, the Fed truly did believe that the economy would run too hot in 2019 like it did for the first half of 2018, and we ended up moving in the other direction all on our own.
The kingpin here is interest rates though, and on that front, things look pretty good right now. Whether or not we get a rate cut this year, we at least know that this card is on the table and will be played if actually needed. It’s hard to overestimate the importance of this to the stock market, having the Fed on our side, and often they are at odds with markets like they were last year.
We need not even wonder why interest rates are seen as so important, although there is no doubt that we pay way too much attention to this than we should. Acting on what we think should be the case rather than the actual truth is what gets us in trouble so much, leading to situations where we have become hurt by this thinking, in spite of our beliefs that these things should not happen.
We’ve actually achieved quite a bit more clarity on how the second half of the year may go compared to not so long ago, where we pretty much know for sure that no rate hikes are coming and if there is any change it will be to lower them. There is a risk that we have been too optimistic about rate cuts this year, and there’s no doubt about that actually, and therefore there may be at least some disappointment on the horizon.
As things stand, we may indeed get a quarter point cut at some point this year, as a preemptory measure more than anything because the economy still looks good, but the most important factor is that the Fed is at least leaning that way and not leaning toward just sitting by and seeing things deteriorate much more than they already have. They haven’t deteriorated much by the way and things may actually have improved over previous forecasts for 2019, the ones that were seen to require slowing down the economy.
Although stock markets always require some degree of speculation, the overall picture for 2019 for stocks looks good. There should be no talk of how far we’ve come in the last 10 years putting a cap on further growth in stocks, or especially requiring a significant correction, because the road ahead is always forward.
This is not a time where investors, and especially longer-term ones, should be too wary, and it takes a lot to shake these investors out, thresholds well beyond what is expected to happen the rest of the year.
As long as the outlook for interest rates remains positive, that’s a powerful influencer indeed and this in itself can allow us to take the temperature of the market in a manner more effective than all the guessing that we see based upon other factors. The sky therefore remains blue, although this does not mean that we don’t need to keep our eye on it for impending storms.