The past two years have seen an unusually low level of volatility in the stock market. That can lead to complacency. Last week we started to see bigger “air pockets” emerge which can be jolting to your system.
The Dow has now dropped a bit over 10% in the past week. A 10% drop is normal. We’re just out of practice. The last correction we had in January 2016 was only about 5.5% to 6%.
So What Happened?
The jobs report came out and showed more people are working. That sounds good, right? But some people read into that the Fed will “tighten” more quickly—or raise interest rates more often. The prediction is that they will do that four times this year. We already knew that. It’s basically a sign of an improving economy. No real problem there.
But that can mean inflation can be on the move too. It’s not a problem now. And most projections show it picks up, but not dramatically so.
Bond interest is rising too. Again, that was expected. The 10-year Treasury is now paying 2.85%. That’s dropped a little to about 2.65% in the past week. We’ve been waiting for it to rise above 2% for quite a while. Economists predict it may hit 3% by year-end. 4% is more of a historical level, but 3% is more likely in this environment for some time.
What Should You Do?
You know what I’m going to say—probably nothing. If you need to rebalance to get back to your target asset allocation, you should consider doing that. Many stocks were on the pricy side, so this can be a good buying opportunity. Most economic signs now show healthy growth worldwide.
Here are some portfolio considerations you might give thought to:
- Growth stocks have dominated over the past ten years since the recession. That tide could be shifting especially with the new tax law. Consider reallocating assets toward the value side to better balance across market cap sizes and styles.
- The U.S. stock market is predicted to perform in the single digits going forward (of course, you never know what will happen in the future!). The dollar has been weaker this year, even though Trump is hoping it will strengthen. Both of these factors support increasing the international portion of your portfolio. We also think multi-national corporations will benefit from the new tax law.
- As interest rates rise, yield-hungry investors will probably jump from dividend-paying stocks to fixed income. So think about how much you want to hold in dividend-paying stocks or mutual funds. And consider where you hold these less tax-efficient types of securities. They may make more sense in retirement accounts. Be thoughtful about selling in taxable accounts as many securities have considerable capital gains that have accumulated over the past ten years or longer. In some cases, it may be wiser to take some gains, pay the tax and rebalance your portfolio.
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