The fourth quarter (Q4) of 2018, and the year itself, was marked by volatility, rising anxiety for investors, and a shift in the market environment. It was a year that saw record highs for the stock market in January and the worst December since the Great Depression. Investors began the year feeling "bullish" but ended by expressing extremely low market sentiment.
The economy remained strong throughout the year, however, while a variety of headlines seemed to coalesce at times to rile the markets. Stocks have recovered from their lows somewhat, but anxiety remains high amid a myriad of risks.
This week let's review two more finance terms: liquidity and compound interest. Both terms are entering the comfort zone of Americans polled by YouGov, a research firm, with a little over half of respondents reporting being comfortable with the terms.
As a reminder, the poll was trying to gauge awareness of 35 finance terms and phrases. Americans claimed to know about three quarters of the list, but how well do they (or you) really know them? I think we'd all agree that awareness doesn't necessarily equal understanding. There's the textbook definition and then there's the real-world, "how does this apply to me" definition. With these posts I'm aiming at the latter.
The stock market has felt brutal the past several weeks, no doubt about it. The widely-reported point swings on indexes like the Dow and NASDAQ seem eerily reminiscent of the 2008 Financial Crisis, so it's natural to be concerned. This is all a bit overhyped by the media, but that goes with the territory.
We've been reviewing definitions to key finance terms lately, but with the stock market going through another manic phase, I wanted to address some of your concerns. I'll do so by presenting a few graphics and then explaining the significance of each.
You know that feeling when you're flying on an airplane and the plane hits an air pocket and the drop makes you feel like you're wearing your stomach as a hat? Well, you'd be forgiven if December's market volatility generated a similar sensation. And you'd be forgiven again if the recent upsurge caught you equally by surprise.
Through last week, the S&P 500 (our best barometer for US stocks) had surged over 10% after declining almost 20% during the recent correction. It's not normal for stocks to do this, but it's not unprecedented either. According to my research partners at Bespoke Investment Group, this kind of move has happened just 12 times since WWII. Historically, returns trend higher in the year following these sorts of gyrations but there's also a chance the market reaches what's called a "lower low" during that timeframe. If nothing else, this should accentuate the point that it's impossible to successfully "trade" market volatility.
Let's review two more finance terms from the YouGov poll we've looked at in recent weeks: Yield and Mutual Fund. Almost half of Americans polled report little knowledge of both terms. Please don't be one of them.
I've always felt a sense of inertia during the holiday season. Thanksgiving passes and then time seems to speed up as the end of the year rapidly approaches. As I've done in prior years, my plan is to take a couple weeks off from writing this blog to spend a little extra time with family.
My next post will be on January 8th, but I'll still be working in the meantime. Please feel free to reach out if you have any last-minute needs or burning questions.
That next post will also be my Quarterly Update, and we'll recap the fourth quarter in the markets as well as the rest of the year. Who knows how the next handful of trading days will work out, but at this point 2018 seems to be one of those "in with a bang, out with a whimper" years. More to come on that topic.
Until then, from my family to yours, Happy Holidays! I hope you get to spend time with family and friends and appreciate the little things that make your life wonderful.
Let's review two more finance terms from the YouGov poll we've looked at in recent weeks: Capital Gains and Losses, and Adjustable-Rate Mortgages. Roughly half of Americans polled had little or no knowledge of these terms. Think about that.
This week we'll define some more finance terms, but first let's review a headline from the past few days.
You have likely heard that George H.W. Bush passed away on Sunday. What you may not have heard is that the stock market will be closed tomorrow as part of a national day of mourning for the former president.
The stock and bond markets traditionally close following the passing of former presidents and vice presidents, but they have also closed for a host of other reasons, such as blizzards, coronations and funerals of kings and queens, the beginnings and endings of World Wars 1 and 2, and in August of 1917 for "heat". And of course, the market was closed for four days following the September 11th terrorist attacks.
There have also been partial closings for local traffic jams and computer system malfunctions, and whole days off to allow office staff to catch up after heavy trading during the Great Depression. A list of historical NYSE closures reminds me that with all the technology underpinning global markets these days, they're still fundamentally human institutions.
Continuing our theme from the past two weeks, here are two more finance terms from the YouGov report that roughly 60% of Americans profess to know little about: Roth IRA and Annuity. Entire books have been written about these terms, but I'll do my best to condense the definitions down to a few short paragraphs.