All of us at New England Capital Financial Advisors would like to take this opportunity to wish you and your family a happy holiday season and a very healthy safe and prosperous New Year. It is one of our greatest pleasures to exchange season's greetings and thank those whose friendship and goodwill are so highly valued.
This holiday season seems to be more enjoyable after a good year of gains in the markets. Most markets have done well this year; stocks and bonds both in the USA and globally. For example, the US stock market, as measured by the S&P 500, has had over 50 new record highs so far in 2017. While some believe the US stock market is overvalued, others believe that the current valuations are supported by record earnings. A company’s earnings may be the biggest factor in determining its value.
In fact, for the first time in years, the world’s major economies all appear to be trending higher. United States GDP (Gross Domestic Product) will increase at a 2.4% rate for 2017 (compared to 1.6% for 2016). Europe and Japan seem to be turning a corner with 2017 GDP rates slightly ahead of 2016’s. China’s growth rate in 2017 shows more stability than many expected. At 4.5% GDP, emerging markets could have room for further growth.
If 2017 inflation is 1.7%, it is very near Federal Reserve’s (Fed’s) target rate for inflation. It is certainly more than 0.7% inflation rate of 2015 when lower oil and energy prices caused consumer prices to be flat or to decline. Social Security recipients can expect a 2% Cost of Living Adjustment (COLA) increase in their monthly checks starting in January 2018. Unemployment rate stands at 4.1% now. Even if you think that number should be calculated higher based on some people working part time or two part time jobs when they would prefer to be working full time, it is certainly under the Fed’s target rate of 6.7%. Interest rates remain low with the Federal Funds rate at 1.25%. The Fed seems committed to a slow, deliberate process of raising rates so as not to slow the economy or derail the stock market.
So low inflation, low interest rates, low unemployment, and slow but steady economic growth has caused the US consumer to feel pretty good about spending. In my opinion, here in the US, we appear to be in a “Goldilocks” economy. Not too slow, but not overheating either. But as we say good bye to the effects of the financial crisis, I’d like to mention a word about stock market volatility, or more specifically, the lack of volatility.
While the US stock market has been hitting these record highs in 2017, we have also experienced the calmest market in more than two decades. The S&P 500 has declined by more than 1% on only four days so far this year. And depending on what happens in December 2017, this could be the first year since 2006 without a single 2% daily decline! Please remember that while current volatility is low, it’s not dead. Any number of unexpected events in the US or globally could trigger panic selling and a sudden spike in volatility. Taking a long term view, preparing for this now and realizing the declines are a normal part of the investment cycle should help you not to follow the herd and overreact.
A history of the Dow Jones Industrial Average from 1900-2016 shows that a 5% or more decline in the market happens about 3 times per year. A 10% or more drop happens about once a year; 15% drop, about once every two years; and a 20% drop happens about once every 3.75 years.
My advice is to look beyond the news headlines. The 24/7 news cycle needs to grab your attention by being sensational. Don’t forget the history that I just described. Understand that market declines are a normal part of the economic cycle and historically recoveries have always followed downturns. Don’t try to time the market. No one knows the perfect times to get in or out of the market. I believe more money has been lost by people who sold low and bought high than by the few people who successfully timed the market’s unpredictable movements. Finally, a diversified portfolio is your friend. Call us to review and make sure you’re still on the right track to reach your goals. We want to ensure your financial success and the achievement of your life goals for not only this upcoming new year but for years to come.
Happy Holidays from all of us at New England Capital
