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Ask The Rational Investor; "Is the next big stock market plunge coming?"

By: Ryan T. Fulmer
Monday, January 7, 2019

The last three months of 2018 were wild! By late September, the S&P 500 and most major stock market indices had appreciated around 10% and reached near all-time highs. Over the next several months, investors saw the year’s gains evaporate with a large sell-off through the end of the year.

In December, the S&P 500, a well-diversified mixture of very large companies, declined by 9%. Other indices such as the S&P MidCap and SmallCap declined even further.

Many clients are asking if the next big bear market is on its way, if their portfolios are prepared for a big decline, and what changes should be made in anticipation of a decline.

Let’s tackle each of these points separately. But, before we do, it is important to acknowledge that these suggestions may or may not be appropriate depending on each individual’s circumstances. Please discuss your own unique position with your portfolio manager.

Most bear markets occur prior to recessions. Economic data is reported daily through various surveys and reports from government agencies. As you can imagine, some data points are more useful than others.

Economists from the Federal Reserve, leading universities, and Wall Street firms analyze this data and make predictions. The economists submit their projections for growth and the averages are reported as “consensus” or the group expectation for economic growth.

Currently, the consensus estimates for U.S. economic growth for 2019 are around 2.0% and 1.5-2.0% for 2020. A clear deceleration of economic growth as compared to the 3.0%+ growth of the last several years, but still economic expansion nonetheless.

The U.S. won’t be alone in slowing growth. In Europe, growth is expected to be around 1.5% in 2019 and 2020, with China continuing to drive growth globally at around 6% per year.

Many Wall Street economists use this data to estimate when the next recession might occur. Goldman Sach’s U.S. Recession Risk indicator currently sits around 10% for 2019 and over 25% for 2020.

One thing is clear, we are no longer in the second or third inning of this economic expansion.

When counseling our clients, we go through a robust process to determine how much they’ll need to spend in retirement to maintain their lifestyle after inflation. After the analysis, we discuss their feelings about risk. Our approach doesn’t change after the market has declined 20%, but incorporates their risk tolerance throughout the process.

A great trick to trying to determine your asset allocation is the following: How many years of withdrawals in safe assets (or cash and bonds) would you feel comfortable with? For example, if your annual spending from your accounts is $50,000 a year and you feel comfortable with 5 years of withdrawals in safe assets you should multiply $50,000 x 5 years, which equals $250,000. If you divide $250,000 by the value of your account it will equal a percentage of your portfolio in cash and safe fixed-income. Work with your portfolio manager to further refine these calculations.

During periods of time when the stock market has abrupt changes, it can be a very emotional period for many investors. Focusing on staying rational, and having a well-developed plan will help during this volatile stock market period.

Beese Fulmer Private Wealth Management was founded in 1980 and is one of Stark County’s oldest and largest investment management firms. The company serves high-net-worth individuals, families, and non-profits, and has been ranked as one of the largest money managers in Northeast Ohio.

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