Hard to believe another month has come and gone, but as they say, “time flies when you are having fun!” We may be having fun, but the markets are struggling to find their footing this year. To put it all in perspective the returns for the major market indexes in April are:
- Dow Jones Industrial Average – down 0.01% (April) & down 0.2% (YTD)
- S&P 500 Index – up 0.2% (April) & up 1.5% (YTD)
- NASDAQ Index – down 2.55% (April) & down 1.7% (YTD)
- Russell 2000 Index (small cap) – down 4.9% (April) & down 4.1% (YTD)
The month was not particularly kind to the indexes, but were choppy as a result of the current uncertainty in the US economy. Below is a chart showing the NASDAQ index since January 2014. The point of this is to show you in picture format the current volatility in the market overall. As stated, the economic picture is causing some unrest for investors short term. I know that a 401k investment is focused long term, but we have to address the short term volatility in order to sleep knowing that are money is okay in the midst of the current market storm. When the markets move lower we start to get flashbacks to 2008 or even 2001 when asset values decline as much as 50%. We are not near those worries currently, but understanding what is taking place gives us some confidence in knowing we can keep moving forward with our current allocation and contributions.
What is worrying both investors and Wall Street? To start with April was the reporting period for first quarter earnings from corporate America. The good news is thus far more than 70% of companies have met or exceeded expectations. The bad new is the revenue growth from sales has been the lowest growth rate since 2010, following the 2009 recovery. Bottom line, companies are not growing revenue at accelerating rates and that will in time impact earnings growth. This begs the bigger question, how are companies meeting earnings if revenue is slowing? Simply put, stock buybacks. They are reducing the number of shares to coincide with smaller revenue to keep pace with per share earnings expectations. All of the concerns/worries around earnings are legitimate, but investors continue to be willing to put money at risk regardless of the warning signs. That has put some of the current volatility seen above in the chart, in play relative to emotions.
Another major concern in April has been the Ukraine/Russia geopolitical worries about a war. Thus far it has not erupted to that level and diplomatic attempts are still in process. The sanctions against Russia have taken their toll on the Russian stock market which has declined 6.9% for the month. How this plays out going forward is still a flip of the coin. If it is resolved peacefully, the global markets will return to their previous uptrends, and everything should move forward. However, if there is a war or violence with Russia taking control of Ukraine the global markets will react negative and the US markets will have an initial downside reaction. How long of an impact to the US markets is a question that only time will reveal. Thus, we continue to watch how this unfolds moving forward.
Economic lethargy is another key concern going forward for the US Stock Market. On April 30th the first quarter GDP was released… growth was 0.1%! That was the smallest gain in more than three-years. Yes, you guessed it, it was the bad weather! If the consumer is buying and companies are growing, the weather has a small impact, but if consumers are concerned and spending less (as they are), and companies are not investing in infrastructure (they are not) or hiring as a result of growth (they are not), then weather may impact what is already a lethargic economy. There is no way to sugarcoat this result, it was bad! But, investors as they have continued to do, believe the weather story… why? They want to own stocks. They want to believe things are getting better. I call this ostrich investing, stick your head in the sand and hope it all works out.
The reasons for the volatility experienced in April are all legitimate. What we have to guard against as long term investors is taking the short term emotions and applying them to a longer term outlook. The chart below is a weekly chart that shows the S&P 500 index since the current uptrend started in November of 2012. As you can see it is still heading up and to the right. That is an uptrend and that is what we all want for our money. Until the trendline is broken by price on the downside we keep moving forward. Yes, we have to take into account what is happening short term, but we invest long term and take it all in stride. When the signals say to sell and get out of the way of a selling market, we will sell and get out of the way. Until then we stay the course, stay focused on our objectives, and let everyone else worry about things we nor they can control.
The theme song everyone sings each May is, “sell in May and go away!” The old adage is if you sell your stocks in May and go away on vacation, you can return in September and be better off than staying invested during that period of time. This ranks right up their with Mary Poppins and ‘the spoon full of sugar’. If the market and the chart above tell us to sell in May, we will gladly do so. But, I am not willing to simply sell because the saying sounds good, nor because someone has done a study to show it works two out of three years. The point is simple have a strategy for managing your money in accordance with your defined risk tolerance. Follow the strategy with extreme discipline and keep moving forward one day at a time with your eye on the prize.
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).
- Jan 1st NAV = $65.20
- April 30th NAV = $66.65 (change YTD = +2.2%)
- Current Allocations from Paycheck (deposits) = 100% Fidelity S&P 500 Index Fund.
If you don’t have Fidelity in your 401k you will have a S&P 500 index fund that is similar with Vanguard 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. Info@JimsNotes.com is the email address.
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Remember, investing is 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.