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On the 30th anniversary of the 1987 stock market crash, U.S. stocks are at a record high and investors are concerned that steep valuations may mean a correction is overdue. Video provided by Reuters Newslook
Investment adviser Sara Walker hears the same question from almost all of her clients when they meet and the topic turns to the stock market’s strong run.
“These are some of the best market results I’ve seen in my 33-year career,” said Walker, senior vice president, portfolio manager and economist at Associated Bank. “So the clients are happy. But usually the first question is, ‘When is it going to end?’”
Walker is not alone in fielding that question.
The Standard & Poor’s 500 index is up about 15% for the year — and around 19% over the past 12 months — without a significant pullback. The Dow Jones average keeps setting new records and has risen about 19% this year. It’s up 25% over the past 12-month stretch.
“It’s been a tremendous run and really no downside volatility at all in 2017,” said Willie Delwiche, investment strategist for Robert W. Baird & Co. in Milwaukee.
But with dazzling results in the ninth year of a long-in-the-tooth bull market, investors have become nervous about how much longer the arrow will keep pointing upward, even though many investment professionals say there is little evidence in the economy that a big correction or crash is coming soon.
One big reason for the worry: Investors still remember the financial beating they took when the market crashed as the Great Recession was settling in, sucking 30% of the value out of major markets.
“People’s fear is rooted in the fact that they believe the next correction will look like the one we had in ’08-’09,” said Brian Andrew, chief investment officer for Racine-based Johnson Financial Group. “People have kind of forgotten that that was a pretty unusual event. It’s not something that happens on a regular basis.”
At the same time, some people are reluctant to sell stocks because they don’t want to miss out on gains that may still be ahead.
What should investors be thinking or doing right now?
A survey of some Milwaukee-area investment professionals yielded majority agreement on at least one key point: Don’t abandon the stock market out of fear, but make smart adjustments that fit in with your needs and tolerance for risk.
“This is a good time to take gains, and use some of those gains to replace the lack of income production, especially if you’re an older investor in particular,” Andrew said. “If you’re a younger investor, then it’s just a great opportunity to rebalance. If your (investment portfolio) target is 60% or 70% equity, you’re definitely over that.”
Delwiche recommends investors analyze their tolerance for risk — how much of a market drop could they could live with emotionally — and then see how it squares with asset allocations.
“If they’re not in line, then make changes,” Delwiche said. “But to make a change just on how you feel things might happen, that is not usually a wise approach to investing. You should look at your what your risk tolerance is. Make sure it’s not built on nothing but a year of upside returns.”
On average, the stock market has a 10% correction each year — but not so far this year.
“Factor that into how you would handle something like that emerging. If your equity exposures would cause you to lose sleep in that environment, then maybe you need to pare back equity exposure,” Delwiche said.
Bryan Sadoff, of Sadoff Investment Management in Milwaukee, said his firm is optimistic for the long term and doesn’t see a recession or bear market on the horizon. But there probably will be “short-term zigs and zags,” he said.
“The market usually has a minor correction or minor dip of 3%, 4%, 5%, 6%, and we haven’t seen that for more than a year,” Sadoff said. “And we get a 10% correction plus or minus about once a year, and we haven’t seen it. It means we’re due for a pause, a timeout. But the market may continue to go up before any of that happens.”
Walker said that when people tell her they’re nervous about the market and want to sell, she makes sure to listen and understand their short-term and long-term financial picture and their fears.
“I make sure I really listen to them, but I also combine that with the fact they are paying me for my expertise,” Walker said. “And my expertise leads me to say, ‘Let’s not do anything drastic.’”
Walker added, “If you are losing sleep at night, there are some small steps to take. If you’ve got 60% of your assets in the stock market, let’s go to 50%. Let’s not go to 10%. Take small steps.”
Walker said the length of the current bull market isn’t a big concern to her.
“Bull markets don’t die of old age. There is something that trips them up, and it isn’t just their length,” she said.
David Hessel, an investment adviser with Global View Capital Advisors in Waukesha, said, “We are not in normal times, so it’s impossible to predict when this bull market will peak.”
However, he said it’s important for investors to consider management of their portfolios before a dip happens.
Sadoff said his firm’s long-term optimism about the stock market is fueled in part by economic underpinnings like a low jobless rate, rising home values, low inflation and low interest rates.
Said Delwiche: “I think most of what’s happened over the past year is a recognition that the global economic environment has improved and improved dramatically since mid-2016. It’s not just the U.S., it’s the world overall. I would guess that’s mostly what’s driving not just the U.S. stock market but stock markets around the world.”
Although the stock market is up, investors are cautious — not giddy to the point where everyone wants in and people are investing money they actually need for the short term, Walker said.
Investment pros acknowledge there could be challenges in 2018, such as the uncertainty of midterm elections and a Federal Reserve with new leadership.
Andrew said given the unusual heights of the current market, investors — particularly people putting new money into stocks — will need to adjust their expectations about what the market normally will return.