Clarks Green Office

285 East Grove Street,

Clarks Green, PA 18411
Complacency Is Not A Strategy

Complacency Is Not A Strategy

May 03, 2019

In my February message to clients, I explained how 2019 had started with a “bang” and the seemingly endless headlines about trade wars & tariffs, government shutdowns, recession, rising rates, and inverted yield curves had literally disappeared as positive corporate earnings and fundamentals finally took the stage.  Since the end of 2018, markets have recouped 100% (and then some) of the losses we saw last year and all of the fear, anxiety, and skepticism that overshadowed the markets has faded into a sea of liquidity and bullishness.  Not surprisingly, the headlines are also rosy as the V-shaped recovery pushes markets to new highs.    

The S&P 500, since the December lows, is up almost 25% and is pressing up against an all-time high once again.  So, where to from here?  Well, if we continue on the current pace, the annual return on the S&P would be around 72% by year-end.  Now, nobody has  a crystal ball, but it’s highly unlikely that the current pace the market is on will perpetually continue and a pause in the rally, or even a medium-sized pull-back from current levels is most certainly conceivable because stock market volatility is normal and should be expected.  Since 1980, the trend in the S&P 500 has been positive, experiencing gains in 32 out of the last 39 years – a consistency rate of about 82% (Source:  361 Capital).  Having said that, market declines throughout any year are very typical and, in most cases, are actually healthy for the market.  Despite long-term positive trends, it’s very important to remember and to expect intra-year declines in the markets of up to 10% or more and, since the markets are so unpredictable, nobody can truly forecast when the next decline will hit – but we can be more prepared by taking action in portfolios now after this recent surge in stocks. 

Market corrections can occur more often than many investors realize because during times of very low volatility, investors become accustomed to an upward bias in the markets and in their investment accounts – watching their investment value increase month-over-month, with no slippage at all is great!  Why worry, right?  The market’s going up every day – it’s unstoppable!  Some investors become tone deaf to the possibility to future losses when the market shoots the moon.

The fourth quarter of 2018 should remain fresh in our minds as we contemplate investment management decisions and are celebrating this bull market rebound.  When the S&P 500 was tanking in December, I mentioned in many messages to clients that I believed the market was dislocated from the economy and that the conditions that had to exist for the US economy to dip into recession just weren’t there – but market didn’t care.  The market was reacting to headlines, the machines took over, and overall, the market got it wrong but, we should use that period of volatility as a lesson and a sample of what we might see sometime down the road.  The abruptness of that move that sent the S&P down almost 20% from its highs came as a shock to many who had been enjoying the bull market run and yet, since then, so many investors are now dismissing the concerns that had them so very worried just a few months ago.

Now, I am not suggesting that we are heading for some kind of cliff, but as I acknowledged in prior messages, the economy, as measured by GDP, has slowed since 2017.  We’re nowhere near a recession or an economic downturn based on the current numbers and economic forecasts, however, because the economic numbers are actually little changed since the middle of 2018, it might make sense to be a bit more cautious when considering the aggressive move that stocks have made.  Being cautious doesn’t mean that we’re running for the hills, it simply means we’re not being complacent.  Complacency is defined as “self-satisfaction especially when accompanied by unawareness of actual dangers or deficiencies” (Source:  Merriam Webster).  Since it is nearly impossible to predict the future and to know when markets will change direction, investors should be proactive in assessing the risks in their portfolios and be attentive to the increased probability of a market correction after such an outsized, short-term reversal occurred in the marketplace. 

In fact, at Capstone, we have recently made practical adjustments to our client portfolios in order to manage overall risk and to take advantage of this huge run in stocks. 

The volatility in 2018 was unprecedented, the machine traders & computer programs were  short circuiting, lots of investors got shaken out because panic did set in, and everyone was paying attention because behavioral finance tells us that we hate losing money twice as much as we love making it.  The key at this point is to recognize how far the markets have moved, determine if the risk in your portfolio is now out of line with your risk tolerance and time horizon, and take complacency-risk off the table.  If you’re disciplined, like I always emphasize, and you stick to the plan, there won’t be any need for panic buttons in your portfolio when the markets eventually correct again.   

If you have any questions regarding your portfolio or would like to set up a review, please call us.  We can be reached at (570) 587-7800 (Direct) or 888-587-7526 (Toll Free). 

(The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.)