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By Rich Weiss - December 28, 2018
Several market milestones will likely make 2018 a memorable year for investors. During the first three quarters of the year, major stock indices kept redefining their record highs. Then, in the final months of the year—notably December—volatility gained the upper hand, and those same indices plunged.
The roller-coaster ride of 2018 provides important reminders about market behavior—particularly after several consecutive years of positive returns. Yearly gains aren't a given, and over shorter periods, performance can be volatile.
Achieving long-term investment success requires committing to a long-term plan tailored to your goals, risk tolerance and investment horizon. In this time of setting New Year's resolutions, resolve to stay the course with that plan in 2019 and beyond.
The ups and downs of 2018 culminated with a wild December. For example, as of December 27, the S&P 500® Index had experienced five daily declines greater than 2 percent. But it also posted a single-day gain of 5 percent on December 26.
Several factors contributed to the heightened volatility. In addition to ongoing investor concerns about trade and global growth, the Federal Reserve (Fed) entered the mix after its December 19 monetary policy meeting. While investors generally expected the Fed's 25-basis-point rate hike, they didn't expect Fed economic and rate-hike outlooks that appeared too bullish.
This forecast triggered more uncertainty for investors already confronting a wall of worries—from slowing global growth, to trade policy tensions, to Brexit negotiations. Investors fear the Fed's rather bullish outlook isn't taking into consideration the effect these global issues potentially will have on the U.S. economy. This raises the risk of a policy mistake from the Fed, which would trigger more volatility. And, adding to the market's latest woes is the uncertainty surrounding the partial U.S. government shutdown.
Fortunately, the overall backdrop is not as dire as recent media headlines suggest. Most importantly, the U.S. economic backdrop remains solid, growing at a 3.4 percent annualized rate, net of inflation, in the third quarter. And although it appears growth may slow, we don't expect a recession in 2019. We believe growth ultimately will revert from its above-trend pace to its trend level of 2.0 percent to 2.5 percent.
Meanwhile, forecasts for corporate earnings generally remain positive. Overall, corporations posted record earnings growth in 2018, partially due to federal tax reform. The tax-cut influence will fade in 2019, but analysts still expect earnings to grow, albeit at a slower pace.
Furthermore, we believe several potential scenarios may help stabilize the market in early 2019. For example, any progress in U.S.-China trade negotiations and/or Brexit ratification would reassure investors. Lower oil prices likely will provide a tailwind for European growth. In the U.S., we expect the Fed may pause in March, which also should have a calming effect on the markets.
While exciting to watch, headlines are not the sort of inputs that should dictate your investment strategy. Your long-term investment success is largely due to things you control—how much you save, your mix of stocks and bonds and how well you stick to your plan when markets get choppy.
Many individual investors experience returns that lag those of the overall market because they tend to buy after rallies and sell after declines—precisely the opposite of what a well-structured investment plan would have you do. It's important to consider and incorporate risk into your strategic plan ahead of time. Making knee-jerk reactions to market volatility, after the fact, is not a winning strategy.
If you have a plan in place to meet well-defined goals, we believe sticking to that plan is likely your best bet. An established investment plan gives you a decision framework to help keep your head even when markets become volatile. Making the decision to buy or sell—or even do nothing at all—isn't something you should do in response to screaming headlines. Instead, make that decision in the context of your specific goals and investing timeframe.
Investors have benefited from nearly a decade of remarkable market gains and historically low volatility. Such a backdrop is unusual and likely to revert to historic norms. For those close to retirement or other major financial goals, it may be a good time to reevaluate your portfolio's level of risk.
If December's market ride had your clients a little too on the edge of their seats, it may be time to reevaluate plans and risk appetite. We can help.
Rich Weiss, CIO, Multi-Asset Strategies, addresses a range of topics, including the drivers of return and risk in target-date funds, elements of glide path design and a breakdown of the SECURE Act.
Understanding the impact of design decisions on retirement outcomes.
The paper explains in a clear and comprehensive way the balance-of-risks approach that underpins the creation of our own target-date series.
Head of Multi-Asset Strategies Rich Weiss is in the "cautiously optimistic" crowd. What's holding him back?
July 12, 2018
Capital market return assumptions are an essential component of the investment tools and capabilities we deploy to aid clients in developing portfolio solutions.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
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