Between December 3rd and the 24th the stock market fell more than 15%. The headlines were bold:
“US stocks log worst year since 2008.”
“Worst December stock performance since 1931.”
“Worst Christmas Eve performance ever!”
“Corporate Profit Crunch Looms.”
One person I know liquidated their entire portfolio December 23rd exclaiming they analyzed the “charts” and everything was going down. They added that a recession was guaranteed to happen in 2020. The media chimed in with unending dramatization on the end of times as we know it.
It’s true that prices did fall 15% in three weeks, putting the yearly performance in the negative. December’s performance was tough. A variety of factors added to investors’ worries.
The federal government is currently shut down. Our president communicates in often impulsive bursts that can confuse and infuriate. Our politicians are at each other’s throats. We are in a tariff stand-off with China. The Federal Reserve is increasing interest rates which pressures stocks. Oil fell 25% for the year. Debt levels are rising, and it appears that GDP growth is slowing.
That’s a lot to digest… even for professionals.
At points like this, it is imperative that people with money in the markets answer a question. Are you trying to “out-trade” the market?
If you’re trading, you are trying to process and implement decisions based upon the flow of information each day, hour or minute. Good luck. You will not win that game. Wall Street will always have better information and faster computers. Even if your logic is right, the markets can be highly irrational for extended periods of time.
If you’re not a trader, hopefully you are an investor. An investor is simply a business owner.
Every day, I watch the Union Pacific railroad move goods back and forth throughout Texas. Take a step back and assume you own 100% of the Union Pacific and then the stock market falls 15% in three weeks.
Did the rail lose 15% of its track? Did the transporter lose 15% of its locomotives? Obviously not. The fundamental value premise remains intact.
Similarly, the last five days of the year the market rebounded 7%. As it should be no surprise, the rail company did not increase its track or locomotives by 7%.
If you are a true investor/business owner, you own assets because of their long-term ability to produce revenue, cash flow and profits. Long-term in our world moves in 10-year cycles. A long time-frame allows you to ignore the day-to-day minutiae and focus, instead, on the operating fundamentals of a business.
Now that we have outlined everything that is wrong in the world, here is a slightly different perspective that is not nearly as sensationalistic.
The Price-to-Earnings Ratio of the market is right at its 50-year average. The market is not expensive.
For 2019, sales for the companies in the S&P 500 are expected to increase 5.4%, while earnings are growing by 8%. Profit margins of 11.8% are at record levels and growing.
Unemployment remains at a 50-year low and productivity is at a 50-year high.
GDP is slowing, but it is not negative, which tells us a recession is not a foregone conclusion. GDP is projected to grow at 2.5% in 2019 and 1.8% for 2020.
Markets are anticipatory. If everyone “knows” there will be a recession in two years, it is already priced in. If the "smart money" is wrong, and things are better, there is good upside to your portfolio.
Interest rates have backed off. The 10-year US Treasury is at a modest 2.7%.
For every $1 decline in the price of gas, the average family has an additional $700 to spend. This is highly stimulative, as 70% of GDP comes from families spending their cash.
The government shutdown is largely theater, and tariff issues should be resolved in time.
As you assess your portfolio in 2019, determine if you are committed to being a long-term investor/business owner. Otherwise, assess why you’re gambling/trading with your hard-earned cash.
Not only will this help you to focus on long-term prospects, but you will trade less, make better decisions and have more tax-efficient performance.Focus on the quality of strong business models and how a business will function over a 10-year cycle.