401k Alert – Economic And Stock Market Risk Is Rising

Each quarter and as necessary, we update our recommendations for 401(k) asset allocations. Our goal is to protect your 401(k) balance from deep losses that can be associated with negative market events (crashes and corrections).

We generally ignore any threat that we deem as a “single digit” risk. That is, if we don’t see the potential to lose double digit percentages, we won’t make an asset allocation change. However, from time to time, risk moves to a “double digit” risk, it is then that we will move to higher ground.

For the basics of our approach, including:

  • how to contributed to your 401(k) plan to build your balance…
  • rebalancing your 401(k) asset allocation to cut risk…
  • our thoughts on “lifestyle” and “target date” funds…
  • sector and country specific funds for 401(k) plans with brokerage capabilities…

please see our introduction piece titled: 401(k) Mapping

A Trade War Threat On Top Of All The Others

The stock market recently entered the “topping phase” of the bull market. While this phase can last for a long time, and very well could last into next year, the recent “tweets” by President Trump regarding China trade negotiations have added significant risks to the markets.

A few weeks ago, I discussed the possibility that there would be no trade deal with China in my weekly webinar. I encourage you to listen to that as your consider how much risk you are willing to take at this stage of your retirement planning:

If the United States and China do not agree on a trade deal, and I put the odds at a coin flip right now, then there will be significant ramifications for global trade. While I know most want to “stand up to” China, the reality is that there are negative consequences to pushing to hard.

If President Trump cannot find a balanced solution to trade, then there is a very good chance that exports decrease and import costs rise. That would mean a slowing economy and some product specific inflation.

The greatest risk to a trade impasse is that a recession would likely begin within a year or so. The odds of a recession are already rising.

Recession Risk Is Growing

This seems counterintuitive to many people. With unemployment at all-time lows and GDP humming along over 2%, most think of this as Utopia. However, there is more beneath the covers.

Here are some charts from top analysts that show a recession could be closer than you think:

Gary Shilling: There’s a “two-thirds probability” of a recession this year.

Gary Shilling: There's a

David Rosenberg: “We have as much as an 80% chance of a recession.”

David Rosenberg:

Liz Ann Sonders: This usually forebodes a recession.

Liz Ann Sonders: This usually forebodes a recession.

Jeff Kleintop: Stocks are saying “welcome to the recession.”

Jeff Kleintop: Stocks are saying

Torsten Slok: More evidence that the cycle is almost over.

Torsten Slok: More evidence that the cycle is almost over.

Those five charts do likely indicate that we are in a “pre-recession” period with the likelihood of a slowdown real. Will it be a recession or simply more of what what I have termed “slow growth forever.”

There is also plenty of evidence that a rally could drag the market up through early next year at least. As I said last month, “the market is in an ambiguous set-up.”

The question for you is: how much uncertainty and risk can you stand? If there is no trade deal and the stock market sells off 20% or more, will you feel more hurt than if you miss a 10% rally?

I throw this in. If the stock market does rally 10%, I think it will fall at least 20% shortly thereafter. As I have discussed, and hashtagged on Twitter as #crash2020, I think 2020 is shaping up to be a very volatile year with the election cycle and potential rolling back on tax breaks for investors and corporations.

Here is my “S&P 500 Risk Chart” once again:

S&P 500 Stock Market Risk

401(k) Balance Asset Allocation Recommendations

Investment CategoryLong-term 
Large-Cap Blended20%15%10%
Mid-Cap Blended20%15%10%
Small-Cap Growth15%5%5%
Developed Markets
Emerging Markets
Money Market or 
Guaranteed Interest Fund