In the Fall of 2018, equity markets sold off.
What was the cause?
Widespread view among economists was an expectation of slowing economic growth in 2019 and a Federal Reserve led by Chairman Jay Powell that was expected to continue to raise rates three more times in 2019.
As anxiety and stress built up in November and December, markets dropped. Between October 3 and October 29 the SP500 fell 9.7%. Between October 29 and December 7 the market bounced around rising 6.5% only to give it back and to fall .3%. However, in the weeks before Christmas, December 7 to December 24 the market fell another 10.7%. Showing the rapidness of the decline, on Christmas Eve the SP500 fell 2.6%.
On Bloomberg Surveillance on April 4th, Tom Keene asked Jim Paulson “Was December the mother of all cathartic events? It was so traumatic.” Jim Paulson responded, “I don’t ever remember a December like that ever in my entire career. It was original, and I think it shocked all of us, myself included that this happened in December… But it looks increasingly like the oddity, what was incorrect and inappropriate, was the December swoon… and we may be overdid the selling more than we should have.” (2)
Since December 24 the SP500 has risen 22.7% as of April 3, 2019.
A primary reason for this market rebound was a change in sentiment around the Fed and interest rate guidance. There was a decision by the Fed on December 19, 2018 to raise rates but to trim the number of projected increases from 3 rate increases to only 2 rate increases in 2019. (1) In late December Fed Chairman Jay Powell gave indications that the Fed may dial back rate increases even more and become more dovish because of indications of economic weakness. In addition, after the January Fed meeting Chairman Powell announced the Fed would not raise rates and is evaluating the data. (3) In the March meeting of the Federal Reserve Open Market Committee Chairman Powell revealed that the Fed would not only not raise rates in March, but indicated there would not be any more rate increases in 2019. (4)
For several years the Federal Reserve has made the statement that its decision-making is “data dependent”. Analysts had long been unsure of what decision making looked like for a “data dependent” Fed. After the January and March meetings the picture became clearer.
Following the March Fed meeting, Chair Jay Powell said, “We don’t see data coming in that suggest that we should move in either direction. They suggest that we should remain patient and let the situation clarify itself over time… It may be some time before the outlook for jobs and inflation calls clearly for a change in policy.” (4)
What does this mean moving forward? No one is sure. Since this event COVID came out of nowhere to cripple the world economy and drive global central banks, including the Fed, to initiate policies to stabilize the real economy. Since March 2020 markets have roared ahead to the point where many economists and advisors are raising concerns that the market is overvalued. Significant increases in commodity prices at the end of the year raise concerns about inflation and the possibility that the Fed will be forced to raise rates sooner than expected. (5)
Is the economy moving into recession? Will the trade war be resolved? Will the Fed’s next move be to cut rates or raise rates? Expert opinion runs the gambit.
What is clear is the need for savers to employ strategies that manage risk to deal with market uncertainty and volatility. One such tool is using a variable annuity. How can we keep up with inflation, make sure we don’t outlive our money, and create a guaranteed income stream?
For savers and retirees, a solution to these issues are annuities that provide guaranteed retirement income*. These types of annuities create a lifetime guaranteed income stream while giving the investor the ability to stay invested in the market. If the market declines, they will continue to get their stream of income. This optional feature is available at an additional fee.
By contrast, someone invested in the market without such guarantees, drawing income and experiencing a down draft in the market they may find themselves running out of money during retirement.
This fear, running out of money during retirement, is people’s number one fear according to several recent studies.
There is a Chinese curse that says, “May you live in interesting times”
We need to be proactive in designing a plan that can improve our chances for financial success regardless of the economic storms that occasionally buffet the market.
If you feel uncomfortable investing in the market, please reach out to me to discuss options that can help you protect your lifestyle regardless of what happens in life. Contact me at email@example.com
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- Bloomberg Surveillance podcast, April 2, 2019