Q4 Thoughts: Too Good to be True?

Matthew Unger |

Too Good to be True? We don't think so.

U.S. stocks—as measured by the S&P 500—have climbed over 20% so far in 2019, a perhaps astounding outcome in a year riddled with uncertainty around trade wars and interest rates. Since the market’s last rebound after the global financial crisis in March 2009, the S&P 500 has delivered an average annual return of nearly 16%— more than 50% greater than its long-run average return. This latest bull run has stretched beyond a decade. These have been good times for investors in U.S. stocks, and we do not see any reason strong enough to end this bull market.

But how long will it continue? This question seems to be asked more and more lately, with some market observers speculating whether a recession awaits.

Recessions and impending market loss can feel dreadful to investors, and rightly so. No one enjoys losing money, even if it’s a number on a page or screen.

At Focus Asset Management, we are not fearing a recession. We still think there are opportunities in markets specifically with regard to securities which we believe in our valuations are slightly overpriced. If we were to see a slight pullback, this would provide opportunity for investors.

“What’s this?” you might be wondering, “my money manager wants prices to fall?” Well, not exactly. Again, falling prices would mean short-term pain for investors. But in the long run, significant buying opportunities typically happen after markets experience this sort of short-term pain. Almost always, these short, and sharp periods of short-term pain (corrections of -10 to -20%) wear off almost as quickly as they arrived, and give birth to later periods of expanding growth and returns. This is especially true when we are talking about bear markets (declines of 20-40%), which we currently do not anticipate.

As valuation-driven investors, we expect to buy into falling markets once prices have dipped below our estimates of their fair value. Buying after a fall when prices are cheap means there’s more room for an asset’s price to grow and less room for it to fall.

Stay the course, stick to your long-term plan and be sure to consult your financial advisor to ensure your plan is on track. Up markets can also be times of excitement for investors, so embrace the excitement, but don't act on it.

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Focus Asset Management & Morningstar Investment Management to provide information on a topic that may be of interest. Copyright 2019 Focus Asset Management & Morningstar Investment Management.