“New York Times said it was the coldest winter in 17 years … I didn’t feel so cold then.” — from “Talkin’ New York Blues,” as performed by Bob Dylan
It’s difficult to know who said it first (the quote has been attributed to J. P. Morgan and John D. Rockefeller, among others), because it’s been more than a hundred years since a knowledge-thirsty young investor approached the wise old millionaire on the street and breathlessly asked, “Sir, what do you think markets will do?”
The humorous but profound one-word response? “Fluctuate.”
So if your neighbor asks you if the bull market will continue throughout 2018, you’ve got a succinct, correct answer. Just say, “Markets will fluctuate.”
That’s not very useful, I know, when it comes to investing your hard-earned money. But even if I knew what markets will do, and I don’t, I’d hesitate to recommend a strategy without knowing a lot more about your age, goals, risk tolerance, and income needs. But just for fun, let’s begin our first 2018 column with a look ahead.
Jay Powell is replacing Janet Yellen. A member of the Federal Reserve’s Board of Governors for the last five years, Powell has frequently voted in support of Yellen’s positions. Will that trend continue? Anybody's guess. Yellen supervised a slow but steady rise in interest rates and continued a huge cash infusion into a struggling economy. But some of the newer members of the Reserve did not serve through the Great Recession and have never engineered federal financial policy during a market downturn, much less through a crisis like the one we experienced in 2008. That’s a bit of wild card.
We assume that the Federal Reserve will raise interest rates to prevent the economy from “overheating.” Most recessions and/or bear markets begin with a series of rate hikes. So Federal Reserve policy is worth monitoring.
If the yield curve continues to flatten, meaning that short term interest rates pay about what long term rates pay, a recession is probably in the offing.
Watch commodity prices. They tend to rise before recessions, because inflation is typically a late-cycle phenomenon in long-running bull markets, and currently commodities are historically cheap compared to equities.
Heed high yield bond spreads. The spread is the difference in interest that non-investment grade companies pay on their bonds over what investment companies pay on theirs. If the spreads widen, it means that investors are fearful that these loans are less likely to be paid back, and that usually portends a downturn.
These are only a few signposts. Bull markets don't last forever, of course. But perhaps this one will outrun the bear in 2018. Or, as a wise man once said, stock prices may simply fluctuate.
Margaret R. McDowell, ChFC, AIF, author of the syndicated economic column "Arbor Outlook," is the founder of Arbor Wealth Management, LLC, (850-608-6121 — www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin.