Double-Digit Earnings Growth—The annual earnings growth for the S&P 500, often used as a barometer of economic health, is currently estimated to be 10.8 percent for Q4 2018. Double-digit earnings growth is widely considered to be a sign of a thriving private sector.
The Bottom Line
The thing is, this information is actually relatively well-known among investors—they just aren’t comforted by it. That’s why we should consider the possibility that something deeper is driving this anxiety. With the 2007-08 financial crisis still fresh in many people’s memories, perhaps many of us have been conditioned to associate market downturn and recession with full-on collapse. While it would be overconfident to say that another financial crisis is impossible this time around, it is important to note that of the 33 recessions that have occurred since 1854, only two have earned the moniker “great.” In other words, it’s unlikely that the next recession will be anywhere near as bad as the Great Recession, and so should be easier to weather.
Set Sentiments Aside And Focus On The Fundamentals
Even ignoring the various indicators pointing to a healthy economy, the stock market is hardly performing as poorly as the headlines might have you think. We have neither seen a decline of more than 20 percent in the S&P 500 Index nor had two consecutive quarters of decline in the S&P 500. Indeed, after dipping around Christmas time 2018, the stock market began yet another rally in January.
It’s generally agreed upon that when there’s a disconnect between how someone feels and how things really are, the best response is not to indulge them, but to persuade them that their thinking is unsound. The same is true of investment advisor’s relationships with clients. Instead of pulling money out of the market, now may be the time to double down on mutual funds with strong fundamentals. Moving away from certain funds just because they have slid recently is a good way to ruin a strong portfolio. Because, while what an investor might think they’re doing is selling while they can still get solid returns, what they really might be doing is losing out on potential gains.
This isn’t to say that investors categorically shouldn’t sell in this market. There may very well be funds that are unlikely to grow now that the market is more selective in the companies it rewards. But if the underlying fundamentals of the companies in a fund’s portfolio are solid, there’s no reason to back out of a good fund. Good mutual funds tend to bounce back, and by the time jumpy investors are ready to invest again, they’ve already missed out on some of the best returns.
However, if your client feels they have good reason to tinker with their portfolio, here are a few suggestions to help you get your clients their best possible returns in this market:
Look For The Bright Spots—When volatility increases, “defensive-minded” funds can outperform so-called “cyclical” funds. Examples of the former include mutual funds that hold utilities, health care and food stocks, while examples of the latter include funds that hold durable and non-durables (airlines, appliances and fashion as well as retail, hospitality and other service sector stocks). Recent data bears the truth of this premise out: Utility and health-care stocks saw annual returns of 4.1 percent and 6.5 percent respectively last year, compared to the S&P 500’s 4.4 percent loss.
Back Off On Passive Strategies—Passive strategies, such as investing in index funds, may show strong returns in a bull market, but they’re easily affected by volatility. Actively-managed funds that focus on company fundamentals, on the other hand, can perform much better during a rocky market. Instead of just tracking industries or indices, they’re managed by some of the industry’s top investment minds, and can be an easy way to get in on those “bright spots” in an otherwise topsy-turvy market.