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Stock market volatility belies strength of U.S. economy, experts say | TribLIVE.com
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Stock market volatility belies strength of U.S. economy, experts say

Stephen Huba
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Trader John Romolo works on the floor of the New York Stock Exchange, Thursday, Jan. 3, 2019. Stocks went into a steep slide Thursday after Apple sent a shudder through Wall Street with word that iPhone sales in China are falling. (AP Photo/Richard Drew)

The stock market roller-coaster ride of the past month may not be fun for investors, but it doesn’t have to be a harrowing experience either, financial advisers across the region said.

Investor worries about stock market volatility are understandable, advisers told the Tribune-Review, but those should be balanced against the multiple signs of a growing U.S. economy.

“The stock market is not really a good predictor of the economy at all. The economy is doing quite well and has been for the past year or two,” said Kurt Rankin, PNC Financial Services Group economist.

Rankin pointed to positive indicators such as a low unemployment rate, low inflation, wage growth, business investment, consumer confidence and a robust holiday shopping season.

On Friday, the National Retail Federation said retail jobs in December grew by 37,600 compared with the same month in 2017, even as the nation added 312,000 jobs overall. Average hourly earnings rose by 84 cents over the previous year.

“Consumers may not feel that great about the economy, but they’re still spending money,” Rankin said.

After Apple reported Thursday that iPhone sales in China are slumping, the Dow Jones Industrial Average plunged 660 points and the broader S&P 500 index fell 2.5 percent.

The stock market saw its highest-ever closing of 26,828.39 on Oct. 3. On Friday, the Dow closed at 23,433.16.

Apple CEO Tim Cook’s comments echoed the concerns that have pushed investors to flee the stock market over the last three months. Many overseas indexes posted their worst year in a decade amid concerns about the global economy and the prospect of further U.S. interest rate increases.

Brad Roth, president of Kattan Ferretti Financial LP in Greensburg, agreed that the stock market is a poor measure of economic health, but its performance is a “leading indicator of future expectations of what the economy could look like.”

Roth is advising clients to trust his firm’s automated process for selecting investments and to not let short-term fluctuations alter their long-term plans.

“We have gotten a few calls from clients who are not necessarily worried but are trying to figure out what’s going on — but not as many calls as you’d think,” he said.

Markets are reacting more quickly to global economic and political developments, which contributes to volatility, Roth said.

“Because the world has changed and a lot of the trading is electronic, things happen faster,” he said. “Some of these future expectations (of an economic slowdown) get priced in a lot quicker.”

Some analysts believe the markets are reacting to forecasts of a recession this year.

“My gut feeling is, yes, with all the instability with our government, foreign governments and the trade wars, volatility is not going to end any time soon,” said Tom Eaglehouse, investment advisory representative at the Estate & Retirement Planning Center , Hempfield.

Eaglehouse said calls from worried investors, however, have been few — partly because his business stresses realistic expectations and partly because it follows a tactical rather than a “buy and hold” model of investing.

“We set the expectation right from the beginning (that) what we’ve experienced since the crash of 2008 has not been normal and is not going to continue,” he said.

Eaglehouse asks clients if the stock market volatility is affecting their daily life or causing sleepless nights.

If so, perhaps they should put their money into something safer until the market evens out, he said.

The volatility is having more of a psychological impact on people who are retiring in 2019 or who have just retired, said Michael Godwin, chief investment officer for Fragasso Financial Advisors in Pittsburgh.

“Nobody’s really used to a market drawdown this big,” Godwin said. “People who are at or near retirement hopefully have planned something like this out with their financial adviser.”

Such fluctuations are the reason why portfolio diversification is important, he said.

“Periods like those which we’ve just experienced are why many investors hold bonds or fixed income in their portfolios. Historically, bonds are one of the best assets to hold in a portfolio, given their low or negative correlations to stocks. So when the stock market zigs, your bond holdings should zag,” he said.

Such holdings not only dampen volatility but also provide a buffer when equities retreat, he said.

Although all major asset classes — domestic equities, foreign equities and bonds — were negative for the year, Godwin said it’s important for investors to keep things in perspective.

For example, stocks frequently experience double-digit, intrayear declines. The average intrayear drop in the S&P 500 has been 14 percent, but, despite the dramatic sell-off in the fourth quarter of 2018, the S&P 500 ended the year down “only” 4.4 percent, he said.

“It just happened to feel far worse (because) after nine years of a bull market, a downward move of this magnitude can come as quite a surprise, and the negative returns in the stock market have all occurred in the last quarter of the year,” Godwin said.

Godwin advises clients to “stay the course” — which is not the same thing as doing nothing.

“There are certain strategies that can be employed within an investor’s equity holdings that can do well in these types of environments,” he said. “Understanding where we are in the business cycle and making tactical adjustments in portfolios can certainly pay future dividends — provided investors don’t panic and head for the hills.”

The Associated Press contributed to this report. Stephen Huba is a Tribune-Review staff writer. You can contact Stephen at 724-850-1280, [email protected] or via Twitter @shuba_trib.