February Retirement/401k Outlook

2015 Starts off the same as last year with the index losing more than 3% to start the year. The headlines are warning again about downside shift in the trend longer term and investors are shifting from optimism to worry. It is fear we have to worry about from a longer term perspective. When fear becomes the driver of action the mass exodus from the markets gets ugly. Based on the long term trendlines we have some room for short term volatility before exiting any positions in our allocation, but that doesn’t make living with the short term selling any easier. The key is to keep our focus and maintain our discipline as this all unfolds.

What is all the worry about? The same old thing… the economic continues to show signs of weakness, the jobs are lower paying ones, earnings in corporations are slowing and newest is price destruction in the energy sector is leading to fewer jobs. Let’s not forget the global geopolitical issues that come and go in the headlines. Europe is still weak and more stimulus is being added to fuel the growth… after all it has worked so well in the US over the last five years.

The chart below is the S&P 500 index for the last thirteen months. Since October the volatility has increased and the trend has moved sideways. The last six weeks plus the consolidation pattern setup has shown the lack of conviction due to worries from investors. We start the year down 3.1% and the 200 day moving average is at 1974. We would uses that level as a exit point for some of our money short term and then address the balance as we move forward.

sp500 gap

What do we¬†watch on the horizon? Earnings growth for one will be key. Fourth quarter is not panning out as expected showing much slower growth than estimated to this point. The GDP growth is slowing and that directly impacts the psyche of investors looking longer term. The global picture is equally a concern as Europe deals with Greece and stimulus for growth in the Euro-zone. As simple as I¬†can make it, emotions are¬†in the markets and the fear of the world crumbling around¬†are back and creating short term worries.¬†Take what the market gives, but remember the exits signs are posted for a reason… know where the exits are and needed use them.

A quick look at the returns for the major market indexes in January:

  • Dow Jones Industrial Average – down 3.7% (January) & ¬†down 3.7% (YTD)
  • S&P 500 Index – down 3.1% (January)¬† & ¬†down 3.1% (YTD)
  • NASDAQ Index – down 2.1% (January)¬† & ¬†down 2.1%¬†(YTD)
  • Russell 2000 Index (small cap) down 3.2% (January)¬† & down 3.2% (YTD)
The major market indexes start the year lower and give some warning as to what may be on the horizon. We will establish our exit points should the warning turn into a storm we want to avoid. The longer term trends are still pointing higher, but we have to pay attention to the warning signs and take the necessary precautions. 

The global picture has seen the greatest impact on the downside as Europe and developed countries struggle to to get their economies back on track. The latest announcements for added stimulus in Europe have helped the view, but the markets continue to be challenged to produce growth in stagnant economic picture. The emerging markets continue to face the challenge of a stronger US dollar and weak commodity prices. Until that picture changes the outlook for upside opportunities is limited.

Economic data remains the one key ingredient we are watching going forward. A growth outlook of 2-2.5% for the first quarter is not enough to move the needle on US growth relative to stock prices. It is all a matter of confidence for investors as we advance through the new year. The key is to not confuse short term activity in the markets with the longer term time horizons. We will continue to measure risk relative to potential rewards, but the charts will always be the deciding factor on how we determine to exit or stay fully invested. Be patient and most of all be disciplined.

The following is our current allocation for 401k portfolios:

  • 100% of assets allocated to the S&P 500 index funds. For our allocation we are using the Fidelity S&P 500 Index Fund (FUSEX). We continue to hold¬†this position for now.
  • Jan 1st NAV = $72.85
  • Jan 31st¬†NAV = $70.66 (change YTD = down 3.1%)
  • Current Allocations from Paycheck (deposits) = 100% Fidelity S&P 500 Index Fund.

If you don’t have Fidelity S&P 500 Index Fund in your 401k you will have a S&P 500 index fund that is similar with Vanguard, T. Rowe Price, or whomever the assets are managed by. If you need help simply send us an email with your list of available funds and we will tell you the best match to the allocation. Jim@JimsNotes.com is the email address.

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Remember, investing is a journey towards a predefined destination. Sometimes the destination changes, but it will always be about the journey, and the discipline it takes to get there.