Things have been too good to be true for investors for the past few years. According to Fidelity Investments, “From March 2009 to January 2018 the S&P 500 gained 364%, generating a compound annual growth rate twice the historical average, amid much lower volatility.”
Volatility has come back and many investors are wondering what happens now. Fidelity director of global macro Jurrien Timmer says its time for investors to lower their expectations. The good news, according to Timmer, is that “over the long run, stock prices generally follow earnings, and earnings are going up.” However, there is plenty of bad news. Timmer explains in his recent note that valuations are under pressure from both tighter monetary policy and anti-trade policies.
According to Timmer, stocks won’t necessarily suffer a major decline, thanks to strong earnings growth, but investors should lower their expectations.
Also, investors should consider rebalancing their portfolios. Last week we spoke to the chief investment strategist of PGIM Fixed Income, Robert Tipp. He said the thing he is most worried about investors getting wrong is having an overallocation to equities as that part of their portfolio has grown. Analysis from Fidelity Investments makes this danger clear: “Since March of 2009, a hypothetical portfolio of 60% S&P 500 Index stocks and 40% bonds would have turned into a portfolio of 83% stocks and 17% bonds if it had not been rebalanced by now.”
READ MORE: Time for lower expectations
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