The equity market has been volatile since October, but now has moved to new lows for the year. This volatility was not unexpected, with asset prices (especially in the U.S.) supported by high earnings expectations and accommodative monetary policy. As a reminder, global central banks had purchased over $18 trillion of securities to support markets over the last 10 years. That positive net purchase globally will turn negative in January 2019, with the U.S. well along in its tightening policy and Europe beginning the same recently.
Economic data (such as housing starts) and surveys that predict future growth have recently turned down. This has caused a reaction in the market, especially because the U.S. had been the only country with resilient economic growth this year. Investors now fret about the combination of higher interest rates (which increases costs to individuals and businesses) and economic slowdown. Geopolitical issues such as the trade war between the U.S. and China, and questions about the U.K. and Brexit, are additional headwinds to market progress.
Although prices have declined, earnings are still expected to grow next year, and a recession is not likely. U.S. equities are now much less extended, given strong earnings growth, and most importantly, international equities are becoming even more attractive. This sets the stage for a potential rebound in 2019.
In the Summer, we had reduced equity exposures in balanced funds (including the Balanced Fund and Target Annuitization Date Funds) and raised some cash. Equity exposure in the Pension Boards’ Balanced Fund is at its lowest since 2011. We further took down some equity exposure within the Equity Fund in August and September to reduce some volatility.
As an additional reference, we want to illustrate (below) the asset mix in our five Target Annuitization Date (TAD) Funds, which are 1) designed to correspond to your projected annuitization date; and 2) automatically become more conservative as you get closer to retirement. These funds can also benefit from buying more attractive assets during these periods, to benefit your accumulation balance and lifetime income calculation when that time comes.
One more reminder: You can engage free financial planning services available to actively contributing Annuity Plan members through Ernst & Young (EY). Contact an EY financial planner at 1.877.927.1047 (Monday through Friday, 9:00 a.m. to 8:00 p.m. ET) to evaluate your positioning and allocation for the environment ahead.