Rocky Markets Shake Fragile Investor Confidence

By Michael LaBella, CFA, Head of Global Equity Strategy, QS Investors

** All market data as of November 26, 2018

The stock market looks forward, not back – share prices are determined by how investors think the future will be. And the economic future is starting to look quite different from the past.

As we exit the goldilocks markets of 2017 and the first three quarters of 2018, we are moving into a late-cycle environment with mounting inflation, rising interest rates and increasing volatility. The post-Global Financial Crisis economic recovery is still supported by strong fundamentals, but some segments of the market have become remarkably stretched.

The S&P 500 Growth Index has led the way during the nine-year historic bull run, outperforming the S&P 500 Value Index by close to 100% over the past decade, up 216% versus up 316%. But value has outperformed growth over the last the quarter by 5%, down 5% versus down 10%. Thus, it may be time for investors to make room in their portfolios for a value run.

Now may be the time to take profits out of the crowded technology/growth/momentum trades that have been dominating markets and add exposure to “unloved” value and defensive sectors, such as utilities and consumer staples, where most investors are under allocated. Investors should not panic – but they should consider rebalancing.

Sell-offs are reminders of the value of diversification, which has been obscured by this extended and narrowly driven rally. Corrections greater than 10% – like the one we experienced recently – are not unusual. In fact, corrections are more ubiquitous than recessions: there have been 12 recessions over the last 80 years, but more than 43 market corrections. Markets typically correct once a year, but there were no corrections in 2017, so we were overdue.

Quarter to date, all major asset classes are in negative territory: U.S. and international bonds, and U.S., international and emerging market equities. Defensive equities were among the few bright spots, taking in stocks with strong dividends and earnings, with less cyclical demand. The utilities, consumer staples and real estate sectors also are positive for the quarter, if only 1%-3%.

Financial markets are shifting. Even before they did, data gleaned from the sixth annual Legg Mason Global Investment Survey (LMGIS) suggested that investors have many concerns, particularly as they consider retirement. Between August and September, we surveyed 1,000 U.S. investors who planned to invest $50,000 or more in the next 12 months.

A mere 31% of these investors reported they believe that they will have enough money saved for a comfortable retirement. If they fall short, 37% say they will work longer or join the gig economy. Are we ready to see our elderly citizens working into their 80s and can they even manage to do so?

Asked if they can “successfully choose investments that could last into their 80s or 90s, “only 32% reported being “very confident.” Differences across generations were stark: 60% of Millennials were “very confident” while only 17% of Baby Boomers were equally confident.

Millennials were significantly more confident in their ability to achieve long-terms financial goals and choose investments, yet they were also significantly under-allocated to equities: overall allocation to equities in retirement accounts were 60%, but 43% for Millennials.

This under-allocation to equities could be a lasting result of the volatility from the Global Financial Crisis: 56% of Millennials report feeling pain from the GFC, and a whopping 60% reported making an emotional decision to sell in a 401K plan they later regretted.

The impact of emotional investment decisions can be tremendous. For example, an investor that got scared as the Global Financial Crisis unfolded may have shifted his or her portfolio to bonds in November 2008. Ten years later, an investor in the Bloomberg Barclays US Aggregate index would have generated a 43% return. Had this investor stayed in the S&P 500 for those same ten years, he or she would have earned 270%!

Investors of all ages are worried that they will not be able to live comfortably in retirement. They have little faith that equity markets will continue to deliver the high level of returns they have come to expect over the past nine years. How can we help them achieve their goals?

Diversification and value strategies could be good places to start. After so many years of running with the bulls, it may be time for investors to slow down, take profits, rebalance – and be ready to play defense.

Michael LaBella is the Head of Global Equity Strategy at QS Investors, a subsidiary of Legg Mason. His opinions are not meant to be viewed as investment advice or a solicitation for investment.

About Legg Mason, Inc,

Guided by a mission of Investing to Improve Lives,TM  Legg Mason helps investors globally achieve better financial outcomes by expanding choice across investment strategies, vehicles and investor access through independent investment managers with diverse expertise in equity, fixed income, alternative and liquidity investments. Legg Mason’s assets under management are $742 billion as of November 30, 2018. To learn more, visit our web site, our newsroom, or follow us on LinkedInTwitter, or Facebook

©2018 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc.

All investing involves risk. Equity securities are subject to price fluctuation and possible loss of principal. Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as, investment advice, forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional. 

Performance shown represents past performance and is no guarantee of future results. Diversification does not guarantee a profit or protect against a loss. Please note that an investor cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.