It was a nice run, wasn’t it? Over 200 days without a 3% drop in the S&P 500 Index and then, suddenly, WHAM, a market correction.
When talking with investors, it’s almost like they think of the world in BTR and ATR terms—Before Tax Reform and After Tax Reform. Many people were surprised that tax reform took a matter of a few months rather than a matter of a few years. As we discussed back in October, when surprises happen, markets move. That’s why the “golden key” to investing is to have better expectations than others. However, that’s really hard to do on a consistent basis. Those who anticipated tax reform would get done were likely duly rewarded for their foresight.
What should investors keep in mind during volatile market conditions? In light of recent market events, we’ve brought together insights from four Wells Fargo Asset Management experts, representing the equity, fixed-income, and multi-asset spaces.
The famous investor Sir John Templeton once said, “Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria,” a quote that links the market to cycles of human emotion. The questions I get all the time are, “Where are we in this bull market?” and “What should I do now?” Well, I would say we are in the place of optimism with some euphoria sprinkled in. Does that mean we are getting closer to the death of this bull? I don’t think so — even when the market drops several hundred points as it did this week in Tuesday’s trading session. But let’s review exactly what all the key variables look like right now.
Income investing is hard when income seems scarce. Even the yield on the Bloomberg Barclays U.S. Corporate High Yield Index doesn’t seem all that high. As of 1-3-2018, the yield to worst on this index was 5.65%, well below the average of 9.12% for the 1987 through 2017 period. Even adjusting for inflation, that yield seems a little skimpy. Inflation—as measured by the year-on-year change in the consumer price index—averaged 2.6% for that time period, with the most recent reading for November 2017 coming in at 2.2%. It is no wonder that income-oriented investors are probably looking for alternative sources of income, and casting a more global net across multiple asset classes.
Investors may already be feeling like 2018 is full of “what ifs?” Naturally, that type of uncertainty can lead to worry. What if an asset class defies expectations, in terms of performance or price? What if a macro driver of returns doesn’t play out the way you envisioned? These are understandable concerns. However, instead of letting “what ifs” and worries build up, why not build a risk management program that can provide strategy, peace of mind, and leeway to adapt if the situation calls for it?
Is the rally in emerging markets (EM) equities finished? Will investors reduce their allocations to the asset class following a 51.4% cumulative return in the MSCI Emerging Markets Index (the EM Index) over the past 21 months beginning in March 2016? Three variables–historical patterns, future earnings prospects, and current ownership of EM stocks–may indicate that the asset class still has room for appreciation.
Find out how different types of assets, combined in new ways, may address longevity risks more completely. Multi-asset class strategist Dr. Brian Jacobsen provides examples.
“What if…?” is a question that pops up constantly, especially when it comes to investing. What if equities fall? What if bond yields rise? It’s sometimes useful to think of the converse: What if equities don’t fall?