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NEED TO KNOW BASIS
Everything you need to know in the world of finance
February 2019 | ISSUE 6
5 minute read

WHAT HAPPENED TO THE
BEAR MARKET?

#TAXPREPTIP
For tax payers who qualify, Traditional & Roth IRA contributions must be made by the April tax filing deadline (April 15 most years including this year).  
SEP-IRA contributions are due before the individual tax return deadline (April 15, 2019 or October 15 if the taxpayer has a 6-month extension).
 
#TAXPREPTIP:  Use extra money you have on hand now, to reduce a 2018 tax burden, by contributing before the deadline.
As December came to a close 6 weeks ago, we sent a short market update encouraging clients to mentally prepare for a bear market.  

With stock indexes passing quickly through a correction (10% drop) in price and stopping at almost exactly a bear market (20% drop in price), it sure looked like we should expect a soft, if not rough, several months ahead.  

But… in the nick of time the Federal Reserve Chair, Jerome Powell, let investors know the Fed has our backs! 
The result was profound. Stocks quickly rose back to their previous and relatively “normal” historic levels.  Pundits began saying “I told you so” and one of the shortest bear markets in history came to an end.  (Bear markets on average last a little over a year - check out this from CBS if you need to know more detail on bear market stats.) 

The technical damage has been done and the head winds are strong but as of mid-February 2019, the bear has retreated.  It is more than unusual that we just experienced one of the shortest bear markets in history during one of the longest bull markets in history.  Typically, the opposite occurrence would be expected.    

 

So, what happens next? 

Obviously, no one knows for certain.  But a few observations are worth noting from the market action over the last 6+ weeks.  

"As of mid-February 2019, the bear has retreated."

Not so logical things observed: 
 
  • Global markets are still very dependent on the Federal Reserve.  Monetary policy is the key driver of this market as it has been since 2008.  The saying goes “Don’t fight the Fed”.   At this point in time it is a little odd to have the Fed so front and center given we are in a "broad global recovery".   Apparently the recovery is not quite as broad or global as indicated if the Fed needs to have the backs of the markets.  Not saying this is all bad, just a little odd. 
  • Markets don’t care about earnings or the “real” economy right now.  Auto loan defaults are on the rise; housing is quite unaffordable; wages are stagnant; and the New England Patriots won the Super Bowl again - which just seams wrong to anyone not living in New England.   Markets care about what the Fed does.  This historically has been a risky proposition given the Fed has a bad track record of ending bull markets.  Here is a good short NY Times article on what historically ends bull markets: A Brief History of Bull Markets.  

  • Markets don’t care about the tax policies that were enacted in 2017.  The tax cuts have been “priced in” for now.  In fact, there are negative economic impacts occurring right now due to the waning effect of the tax cuts.   A bit on that here by way of CNN.  Markets care about what the Fed does.

  • Markets don’t care about democrats winning the US house or a wealth tax on the richest Americans.  Stocks have been solid since the most recent US Congressional election.  Markets care about what the Fed does

  • US markets only slightly under performed most non-US markets since the end of December 2018.  This is a little weird given US stocks are quite expensive compared to the rest of the world.  (But not very weird because expensive stuff can stay expensive for a very long time and cheap stuff can stay cheap for a very long time even if the price is illogical.) . You guessed it, markets care about what the Fed does. 

 

"Don't fight the Fed"

More logical things observed: 

  • Staying invested even when signs point to a rocky road ahead is often a wise move.  It is scary to take a look at a likely downturn yet stay invested.  However, this approach can pay off both when you are wrong and when you are right about the future.  As long you have a solid plan for managing the rocky road, that is.   
  • Balanced portfolios tend to weather short term corrections and bear markets well.  The value of balance and diversification is mostly felt during a volatile patch, not in a straight up or straight down market environment.   

  • Technical market price targets are being hit in a very precise way.  Algorithms appear to be pushing market prices to very specific up and down levels.  This is likely because computer programs are being written to test market participant “emotions”, netting the best return for the algorithm owners and scaring the largest number of participants into poor decision making in the process.   This is a great example of why letting emotions guide investments can cause bad decision making.  The algorithms don't have emotions, only the authors of the algorithms due (at least for now).

What You Can Do

Continue to reach out with tax, finance and risk/insurance related questions as you did over the last several weeks!  We love hearing from you and always learn a tremendous amount from our conversations.  Being silent or freaking out internally when you have unanswered market questions only harms you and creates stress. Our job is to walk you through ANY kind of market. Feel free to call us up!

Last but not least, in an effort to better manage our communications with you better Renée invited you to join our newsletter list (if you are not already receiving it).  We are in the process of phasing out the old “mass” email format to provide more efficient information transfer services to you our clients.   

If you enjoy what we've been reading - Need to Know Basis newsletter is for you!  If you don’t want these sorts of market updates in your inbox, no problem at all.  No judgment on our end. Your time is valuable, and we don’t want it going to suck it up with spam.  You can unsubscribe here.


Again, feel free to reach out with any questions or something that you know that you think we should know too!

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