By Steven Rogé, MBA, AIF®, CMFC®
Director of Research and Portfolio Management

The S&P 500 closed in bear market territory last week for the first time since 2008.  A bear market is defined as a loss of greater than 20% from its previous high, which occurred in September of 2018.  The stock market has been on a bull run since March of 2009 one of the longest on record.  So, while everyone seems surprised, everyone also knew it was bound to happen, but no one knew when.

Not all bear markets are accompanied by recessions in the economy. When we had bear markets that were not followed by a recession, there was usually lots of uncertainty and disorderly markets – think “Flash Crash” or “Program Trading”. “Blame it on the algorithms” many are saying on the financial networks, but this is too simplistic and actually just background noise. The real concern is that the Federal Reserve has been increasing interest rates and at the same time reversing Quantitative Easing (QE), which is now being called Quantitative Tightening (QT).  Both these actions, if continued together could slow the economy and drive it into a recession.

While the current administration, in The White House, and in Congress are doing more than their fair share of adding to the global geo-political uncertainty, the markets look for certainty and clarity.

Federal Reserve Chairman, Jerome Powell, made two big mistakes recently. The first occurred during this Fall at a press conference were Chairman Powell said that the Federal Reserve had a way to go in increasing short-term interest rates. The second mistake was just two weeks ago when he said that the Federal Reserve’s program to reduce the balance sheet was on “autopilot”. This was of particular concern to investors, since raising interest rates while the economy is growing nicely, with very little inflation, could push the economy into a recession.

Regardless of the cause of the bear market the most important thing for investors to remember is that it is temporary and more importantly that you have a financial plan that takes variability in investment returns into account when planning for goals. To attain these goals, we have target investment returns that draw from history and we utilize these historical returns to tie in your portfolio’s return to your goals. As we explain to our clients, those projected returns don’t need to be met every year, just over long periods of time, so a single year’s returns shouldn’t be a major concern to achieve those goals.

It’s normal to question your portfolio during times of financial downturns. It’s human nature to feel uncomfortable as portfolio values decrease, and all the negative news headlines make it look like there is no end in sight. These negative situations are considered when developing our clients financial plan. Our Certified Financial Planners (CFP®) utilize a tool called the “Bad Timing” scenario. This tool hits our client’s portfolio with a bear market scenario the day they retire. This is the absolute worst time for a big dip in a retiree’s portfolio since they are now distributing money from the portfolio and can’t take advantage of generous valuations in the investment markets. Just remember that we planned for this!

How can we capitalize and even thrive from volatility in the investment markets? The answer isn’t some complex trading or hedging strategy.  It’s simple, rebalance your portfolio! We’ve used this strategy successfully since 1986 and it continues to work today. We had many client accounts that became overweight in stocks during the stock market rally earlier this year and we took advantage of that by selling stocks and rebalancing into bonds and cash.

The process of rebalancing helps our clients in two important ways. It forces us to sell appreciated investments and reposition those assets in the portfolio to bring back in-line the risk and return profile that was laid out in the financial plan. This disciplined process buys low and sells high.  That is what your portfolio should be doing without emotion. Re-balancing is an academically proven process, that works as long as one does not let emotions get in the way.

What does the market hold in store for your portfolio in the coming year?  While nothing is certain, if the Federal Reserve does not push the economy into a recession, current stock market valuations will prove to be a great buying opportunity and send the market higher.  If we do rollover into a recession it looks like valuations have already taken that scenario into account, so the downside for stocks from here should be relatively muted, that’s not to say that stocks could not go down another 10-15% from the previous highs.

The earnings of stocks are what drives the S&P 500.  The earnings consensus forecasts by economists puts the S&P 500 earnings for 2019 at $175.  At 16 times earnings, which is a reasonable multiple, this puts the S&P 500 at 2,800. The S&P 500 is currently at 2,486.  That is a 12.6% increase for 2019.

The comments in the paragraph above are all about stocks.  As you know, that is only one asset class that we use in our client’s portfolios.  We also use bonds and cash, which helps us mitigate some of the volatility.  Cash is becoming a usable tool for us again, since many money market funds are pay interest of two percent, as opposed to near zero for the past ten years.

We will continue to utilize our tried and true process of asset allocation, diversification and re-balancing and stick to our client’s respective financial plans to make the most out what has turned out to be a poor investment climate for 2018.

We have completed tax-loss selling to take advantage of losses to offset gains in our client’s taxable portfolios. We will be monitoring closely in the coming days and weeks to see if any client’s portfolios have hit a level that would trigger a rebalancing.

If you have any questions, we encourage you to reach out to our Certified Financial Planners (CFP®) would be happy to walk you through your financial plan projections to make sure you are on track toward obtaining your goal(s).

If you are not a client and would like to discuss your portfolio and financial planning needs, please contact us at 631.218.0077 or at to schedule a complimentary consultation.

Wishing you all a very Happy, Healthy and Prosperous New Year!

© Copyright 2018 R. W. Rogé & Company, Inc.  All Rights reserved.

CFP® is a registered trademark of the Certified Financial Board of Standards.

Steven Rogé, MBA, AIF®, CMFC® is Director of Research and Portfolio Manager of R. W. Rogé & Company, Inc.  603 Johnson Avenue, Suite 103, Bohemia, NY 11716.  Phone: (631) 218-0077; Website:

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