Take the Current Rally with a Grain of Salt

As I pen this article, major US stock indices are hitting all-time highs.  As a result, many investors are peering at their statements or live-streaming devices and are giddy that their net worth continues to climb.

When times are good, it is human nature to remember these high water marks and use these elevated market values as a base in which to gauge future performance.  By raising the bar every time one’s account hits a new high, investors are setting themselves up for great disappointment when the market experiences a pullback.

Case in point is 2018.  During the first nine months of the year, the S&P 500 rose by 10.6%.   However, in the fourth quarter of last year, the S&P fell by 13.5%, resulting in a loss for the year of 4.4%.  While this annual performance was indeed disappointing, it followed a year (2017) when the S&P registered a return of 21.8%.  If one looked at a two-year average, one would find that the market averaged 7.9%.

So, while the market performed fine from a two year perspective, and even posted a surprisingly strong ten year return of 13%, many investors were unnerved by the mini-correction that occurred last year.

So, here we are again.  For perspective, the S&P 500 is up 25% YTD, providing a new high water market.  As a result, many investors are peering at their market values and much like last year, feeling a bit smug as their personal net worth continues to climb.  Yet, it is inevitable that this market will ebb and flow, and today’s valuation may be fleeting.

For many investors, the equity portion of their portfolio represents an asset base that may not be materially invaded for decades.  In such circumstances, we believe investment performance should be measured with a longer-term time frame than daily, weekly, monthly, etc.  In doing so, one can reduce a great deal of anxiety during periods of weakness as long as the longer term trend remains acceptable.

In closing, enjoy the ride but do not be too quick to raise the bar as this will only set you up for disappointment when the market inevitably takes a breather.

All comments and suggestions are welcome.

Christopher J. Kress, CFA