Needless to say, 2018 was a crazy year. The chaos in the country’s politics, fanned virtually every day by our Chaos-in-Chief, finally caught up to the stock markets in the last quarter. The markets narrowly avoided their first bear market since 2008-09 and have begun 2019 with the longest shutdown of the U.S. government in history. The shutdown is causing more economic damage every day and unless some sanity kicks in somewhere to restart government services, this alone could tip the country into recession, accompanied by that long-awaited, and anticipated, bear market.
After reaching all-time highs on January 26, 2018, the Dow Jones Industrial Average and the S&P 500 went into a two-week slide that saw both stock indexes drop by more than 10%, a decline that is typically considered a market correction.1
Analysts have been saying for several years that the long, booming bull market was overvalued and due for a correction, so the drop was not a surprise in the big picture.2 And even after the 10% plunge, the Dow was up 19% over the previous 12 months, and the S&P 500 was up 12.5%.3
It's natural to be concerned about this kind of shift, but more important to maintain perspective and focus on your long-term goals. It may be helpful to consider some of the reasons behind the surge of market volatility.
OK, a couple of my clients have wondered why I haven’t bothered to comment on the recent gyrations in the market. I might well have commented around February 7 when it appeared the sky was falling, but as it happened I was on vacation in St. John, one of the Caribbean islands hit hardest by last fall’s hurricanes (and happy to be there spending money, thereby helping the recovery efforts). Internet service on the island is still very sporadic, and we didn’t have any service where we were staying that week. Standing outdoors in St. John, it was nice and warm, and the sky didn’t appear to be falling at all, just blue and beautiful.
Of course, by the time I returned home the market indexes had begun to recover, and the Dow Jones Industrials and the S&P 500 ended last week up 4.3% each, their biggest gains in five years. Stocks are still off their recent record highs, but certainly things appear to have stabilized.
I closed off 2017 with an SRI Investing tradition, making two donations to honor you, my clients, in appreciation of the trust and confidence you place in us. Even more importantly, you care enough to invest your assets to help create a better world. The first donation went to Heifer International (www.heifer.org), helping to create financial opportunities in underserved communities worldwide. The second donation is to purchase carbon offset credits from Native Energy in Vermont (www.nativeenergy.com), to make our professional practice carbon neutral. Native Energy was founded in 2000 (the same year I started my SRI practice) and is now a leading provider of carbon offsets, renewable energy credits, and greenhouse gas consulting.
The new tax law hasn’t been formally ratified by the U.S. House and Senate, but all indications are that the Tax Cuts and Jobs Act of 2017 will be sent to the President’s desk in the next few days. As you probably know, the House and Senate versions were somewhat different. What does the new bill look like?
SRI investors, like virtually all investors, know that over time markets go up and markets go down. When they go up for an extended period of time we call it a bull market – vice versa, it’s a bear market. Well, we’ve had a bull market now for a very extended period of time, more than 7 ½ years. Eventually, a bear market will follow. We know that. We just don’t know when and how severe it could be.
I happen to believe in some unsubstantiated investment “street” wisdom – that more money has been lost trying to avoid market “corrections” and bear markets than has been lost in the events themselves. If that wisdom is true, it is for a simple reason. Investors who bail out of their stock holdings while predicting (i.e. guessing, following a hunch or a chart) a market downturn are very often wrong about the timing. After they pull out, the market continues to go up for a substantial period of time – they miss out on the upside in their anticipation of the downside