By Maurice Stouse, Financial Advisor and Branch Manager
Many investors have experienced significant ups and downs lately and are trying to understand what is going on and how to make or adjust their strategies accordingly. Many just want to know, why the increase in volatility? There are several aggravating factors and some mitigating factors to look at and we will explore those here.
Start with interest rates. The Federal Reserve began raising rates last year and the federal funds (or overnight rate) is now approximately 2-2.25%. Concurrent with that is the rise of the benchmark 10-year Treasury note yield which is now over 3%. Investors could be shifting assets from stocks to bonds or to other more conservative investments. The Federal Reserve has also reduced the size of its balance sheet by approximately 8%, which takes money out of the system. Hence there are fewer dollars out there and possibly fewer dollars to go in to risk based assets like stocks (and commodities and real estate). Some of the impact of these is a continued or even stronger U.S. dollar. A stronger dollar makes U.S. exports more expensive and could hinder profits, or earnings.
Wages have started to move up for the first time in almost a decade as well as some upward movement in the overall inflation rate. Many people consider that the economy continues its expansion at a healthy rate and see that unemployment is at a 50-year low at 3.7%. It is also important to consider that firms that are hiring might be seeing an increase in competition for labor. Hence, cost of labor and cost of materials (and the effects of tariffs remain to be seen) are higher and these could lead to lower productivity and lower profits over time. To be clear, a majority of companies reported strong earnings for the third quarter, however many consider the stock market to be a forward looking indicator and current volatility is evidence of that.
Are stock valuations high (selling at higher multiples than they have over time) or ahead of historical performance? Depending upon the time frame you are looking at (using March 2009 to present as an example) investors might have reached that conclusion. There are a variety of research tools available on line or from your advisor that can give investors these types of figures. On the other hand, looking at performance over time (as many see time in the market as more important than timing the market) is a guide that investors can use. According to the Stocks, Bonds, Bills and Inflation Yearbook, by Roger G Ibbotson and Rex Sinquefield, from 1926 to 2017, returns have been as follows: Small stocks 12.1%, large stocks 10.1%, government bonds 5.5%, Treasury bills 3.4% and inflation, 2.9%. Source: Morningstar and Raymond James. These returns have never been linear however which is why investors should assess and plan accordingly.
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Maurice Stouse is a Financial Advisor and the branch manager of the First Florida Wealth Group and Raymond James and he resides in Grayton Beach. He has been in financial services for over 30 years. His main office is located at First Florida Bank, 2000 98 Palms Blvd, Destin, FL 32451. Branch offices in Niceville, Mary Esther, Miramar Beach, Freeport and Panama City. Phone 850.654.8124. Raymond James advisors do not offer tax advice. Please see your tax professionals. Email: Maurice.firstname.lastname@example.org.
Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC, and are not insured by bank insurance, the FDIC or any other government agency, are not deposits or obligations of the bank, are not guaranteed by the bank, and are subject to risks, including the possible loss of principal. Investment Advisory Services are offered through Raymond James Financial Services Advisors, Inc. First Florida Wealth Group and First Florida Bank are not registered broker/dealers and are independent of Raymond James Financial Services.
Views expressed are the current opinion of the author and are subject to change without notice. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts will occur. Investing always involves risks and you may incur a profit or a loss. No investment strategy can guarantee success.
Holding stocks for the long term does not insure a profitable outcome. Commodities and currencies investing are generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. Gold is subject to the special risks associated with investing in precious metals, including but not limited to:price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated.