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A YEAR AGO, I WAS worried about the stock market. Today, I’m concerned about the job market.
In December 2017, I penned an article entitled Best Investment 2018, which turned out to be surprisingly prescient. That wasn’t really my goal. At the time, I was simply pondering rich stock market valuations, tiny bond yields and the new tax law, with its higher standard deduction and limits on itemized deductions. Putting it all together, it struck me that paying down debt—even mortgage debt—seemed like an awfully smart move.
Since then, the S&P 500 has dipped modestly, while reported earnings per share are expected to climb 28% in 2018. The passage of time has done the work usually done by market declines: It’s helped to sharply improve stock market valuations.
A year ago, the S&P 500 companies were trading at 25 times their reported corporate profits for the prior 12 months. Today, that multiple is down to 19.9, based on earnings for the 12 months through 2018’s third quarter from S&P Global. A year from now, the S&P 500’s price-earnings ratio could be as low as 17, assuming stocks continue to tread water and earnings come through as expected.
To be sure, stocks remain expensive by historical standards. But that isn’t especially alarming. After all, stocks have been overvalued for much of the past three decades, plus today’s lowly bond yields are hardly a compelling alternative.
And to be sure, 2018’s handsome earnings growth has been fueled by 2017’s corporate tax cut and by continued fat company profit margins. The onetime boost from cutting taxes won’t, of course, be repeated in 2019. But there doesn’t appear to be any immediate risk that the tax cuts will be reversed.
Does that mean the recent market turmoil has run its course? I have no clue. Forecasting short-term market performance is a mug’s game, because it necessitates predicting not just the news, but also how investors will react to that news.
Indeed, when it comes to stocks, I find myself firmly on the fence. On the one hand, we haven’t seen anything that looks like a market bottom. There’s been no revealing of financial excesses, no squeals of economic pain, no horrendous decline in stock prices, no relentless declarations of doom from the pundits. On the other hand, thanks to improved valuations, buying stocks today doesn’t seem nearly as perilous as it did a year ago.
That brings me to the question everybody seems to be asking: Will the economy weaken? The financial markets appear to think so. The stock and bond markets are suggesting that a recession could be in the offing. When I look around, I don’t see many signs of a U.S. economic slowdown. But it’s foolish to argue with the markets, which reflect the collective wisdom of all investors.
If the economy does indeed weaken, the big worry for many families won’t be the stock market. After all, only half of Americans even own stocks and stock funds. Instead, the top concern for most Americans will be the job market.
We’re now at 3.7% unemployment, down from 10% in October 2009. The Federal Reserve expects 2.5% real economic growth in 2019, with unemployment dropping even further, to 3.5%. Let’s hope the Fed is right.
But in case the folks there have it all wrong, there’s good news: You might have 12 months or more to prep your finances for rough times. How come? The stock market is a leading indicator: It starts falling before the economy contracts and it rallies before a recession is over. By contrast, unemployment is a lagging indicator: Companies are slow to shed workers when the economy turns sluggish, though they’re also slow to rehire when economic growth resumes.
Worried you could lose your job in the next economic downturn? The obvious move is to stockpile cash. While that’s prudent, it shouldn’t necessarily be your top priority. Here are seven other things to do now:
Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include No Kidding, Taking Us for Fools, The View From Here and A Little Perspective. Jonathan’s latest book: From Here to Financial Happiness.
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Good article. I am forwarding this to my friends who are still working. Any recommendation for people who already retired? We have no mortgage and no debt (decided to pay off our mortgage early this year based on your recommendation in your Dec-17 article). I have been preparing for the down turn in the stock market since we retired in August this year. We have enough cash for the next 7-10 years and I think we may be over-prepared for it. I am thinking of using some of the cash to buy more stocks next year. Any thought?
The good news is, if you’re retired, you don’t have to worry about losing your job! It does indeed sound like you have plenty of cash. If you are sitting (partially) on the sidelines with cash that you’d like to put to work in the stock market, you might use the strategy I outlined in a November newsletter:
https://humbledollar.com/2018/11/the-view-from-here/
That’s a very good advice to invest on a 24-monthly investment schedule and increase the amount when the market decline further. Thank you!
Solid advice. However, you won’t owe a 10 % penalty on a 401k withdrawal if you are over 55 – so it is slightly less painful.