The stock market has rocketed off to a ridiculous start in 2018. In fact if it continued at this pace we would be looking at gains past 100% for the S&P 500. Of course, that prediction is absurd and that’s why with the latest run up we should be wary that this won’t last. The reason for much of the optimism is coming from the massive corporate tax cut that President Trump has enacted at the beginning of the year. There is much anticipation in the markets that profits from the first few quarters of fiscal 2018 will be monstrous as corporate taxes were cut 40%.
Now most of these results won’t show up in corporate financial statements in the coming month because the taxes didn’t come into effect until 2018. Many corporations will show massive losses due to tax write-offs instead to comply with the new tax laws. So what’s in store to come? It’s hard to tell what the impact will be, but let’s not get too excited or in over our heads. Despite the recent speculation that profits will be great, as an investor, we should still temper our expectations.
Review Your Portfolio
Just like previous years, the fast run up of stocks should make you leery of any potential correction. What’s making it more likely that it may happen this year is because the current run up in stocks is unsustainable. At some point the market will most likely overshoot and over predict the benefits of the tax cut. This is a time to stay defensive in your investment portfolio. That’s doesn’t mean you should be selling all your stocks, quite the contrary. What you need to watch carefully is ensuring your balanced portfolio stays within the percentages you want to be allocated to each type of asset.
If you are investing in a balanced portfolio with 60% in equities and 40% in fixed income assets, then make sure that you are staying as close to those ratios as possible. With equity markets rising so much faster than fixed income assets it might not be surprising to see the percentages getting skewed more towards a 65% to 35% ratio. Now is not the time to be greedy. Despite the fact that markets are roaring, a balanced portfolio is not meant to chase gains. That’s for gamblers. Investors stick to their thesis and ignore market emotions.
Don’t Forget Bonds
As markets rise, one of the things that gets neglected the most are bonds. Remember that bonds are the anti-equities. Since bonds have negative correlation to stock prices, one thing that will happen is that bond ETFs will actually drop in value. Yes, that means you will take a capital loss on your bonds. Don’t fret. This is normal. The reason why we have bonds in our portfolio is for this very reason. To lose money!
No seriously, bonds put the brakes on our stocks and provides a safety measure when stocks are rising. That’s because inevitably when stocks go too high and correct, it’s the bond portion of your portfolio that will save the day.
Try not to pick individual bond purchases. That’s because it takes a lot of careful thinking to pick the right mixture of bonds. Stick to a bond fund that has both short and long term bonds. Since interest rates are expected to rise, long term bonds will fall much faster in price than short term bonds. Short term bonds should experience some volatility as interest rates rise but not as much as long term bonds.
Crazy Roller Coaster
This year might be the year that investors will finally have to stomach big drops with gains. Just like the last couple of days where the market has dropped over 600 points, don’t be surprised to see this trend continue. Even 1000 point drops aren’t going to be rare. Why’s that?
The economy is booming in the United States which will be great for corporate profits and job gains. However, on top of the good news will come news of interest rate hikes. These hikes will take the wind out of the sails for the stock market and cause steep drops. In fact, good news will become bad news and bad news will become good news. Don’t be surprised to see good employment numbers signaling bad days on job markets. How strange is that?
For the first time in the last few years, investors will actually see big losses over a week like 10%. This will really weed out the investors from the gamblers. Those in for the short term will see their portfolios run red and they will cry for the exits. What should you do? Stay balanced, stay invested and don’t worry too much about the fluctuations. Let your investment portfolio do it’s thing over the long run. Don’t worry about the losses. Think of it as buying opportunities. Like a sale at a shoe store.
Just remember that as the herds run for the exits, that’s when you want in. When everyone is jumping on something, that’s when you want out. Keep thinking like that and you’ll always end up on the better side.