Recently, the focus for investors has been all over the map. This is not an all-inclusive list but it adds up to a whole host of worries investors are grappling with in the short term:
- Oil prices
- Corporate earnings
- The global economy
- China’s economy
- China’s currency (the Yuan)
- Anxieties about banks (especially in Europe)
- The Federal Reserve’s next move
- “Brexit,” – the possibility that Britain will exit the European Union
- Emerging market debt
- Political uncertainty in the U.S.
Despite all this, U.S. stocks in March ended mixed as oil prices ticked higher and the economic data improved. Notably, the positive economic reports come at a time when the global outlook is tepid at best. But it highlights that the driver of U.S. economic activity isn’t coming from overseas. Instead, it is homegrown.
If you listen to the pundits of doom and gloom, we’re going to enter a recession this year that will take stocks to new lows. First, let us state the obvious and then we’ll provide an example below: Economic forecasters do a pretty lousy job of calling turning points in an economic expansion.
Think of it this way: Pile a bunch of seasoned sports analysts into a room and ask them who’s going to come out on top of an important football or basketball game. While they will offer a thoughtful analysis of each team’s strengths and weakness, and may even agree on many points, they will draw different conclusions as to the outcome. And their predictions for the final score – well, those will vary widely. (See UNC vs Villanova)
The same holds true for economists. Take former Fed Chief Alan Greenspan, who headed up the Federal Reserve from 1987 – 2006. In March 2007, Greenspan said there was a “one-third probability” a recession would take hold in the U.S. that year. By December, the U.S. would enter what would eventually be called the “Great Recession.” So much for Dr. Greenspan’s complex forecasting models.
Still, any hunches he may have had at the time were more in line with what was eventually to pass. His successor, Dr. Ben Bernanke, had just told Congress the economy might strengthen. “Overall, the U.S. economy seems likely to expand at a moderate pace this year (2007) and next (2008), with growth strengthening somewhat as the drag from housing diminishes.”
Why does all of this matter?
To repeat what we said a moment ago, there has been increased talk about how the U.S. economy may enter a recession later this year. And recessions depress stocks. In no way is the recession chatter the consensus view. But it does add some uncertainty to the mix, and it has pushed out forecasts for a recovery in corporate profits. If economic growth stalls later in the year, it would put added pressure on corporate profits and further delay any earnings recovery, because historically corporate earnings have been a byproduct of what’s happening in the economy.
As we’ve already said, economic forecasting is an inexact science. But we’ll give you our opinion: We will descend into another recession. That’s right, we said it. It may be in 2016 or 2017 or 2018 or beyond. But an eventual recession (and subsequent recovery) in a free market economy is to be expected. And when it happens, stocks will probably lose value, since bear markets closely correlate with recessions.
While the individual plans we recommend mitigate some of the risks, they do not eliminate risks. Over the longer term, however, we are confident your plans have you on the path to your financial goals.
Given the volatility that strikes the market from time to time, we want to encourage you to avoid watching the daily gyrations in stocks. While none of us enjoy seeing the market decline, let’s remember that it never goes up in a straight line. There is plenty of uncertainty in the world (hasn’t that always been the case?) and we are bombarded with bad news daily.
We hope you’ve found this review to be educational and helpful. When we look back at the years we’ve been serving all of you, it’s really quite humbling that you have entrusted us to serve as your financial confidant and advisor. It’s something we never take for granted.
As we always emphasize, it is our job to assist you! If you have any questions or would like to discuss any matters, please feel free to give us a call.
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.