17 May February 2018 – Thoughts on the Market
Thoughts on the Market
Volatility has returned to the equity markets. As of the market close yesterday, the S&P 500 is down 10% from its peak in late January. Given this sudden turn in the markets, we wanted to share a few important points:
- Volatility is a normal part of financial markets, and the lack of volatility over the last 2 years has been very abnormal. In fact, going into this week the S&P 500 was on the longest streak in over 60 years without at least a 5% pullback. Furthermore, since 1980 the average intra-year pullback is 14%, and the market still had positive returns in 29 of those 38 years. In short, stock market corrections are normal, and we had been overdue for one.
- Economic and earnings growth, both domestically and internationally, are on solid footing. In addition, valuations that were arguably stretched are now close to the 25 year average.
- One of the reasons for this pullback can be attributed to the increase in interest rates. Data released last Friday showed a greater than expected increase in wage growth, which led to inflation anxieties and higher interest rates. The current late-cycle expansion is likely to produce a tug of war amongst investors as they weigh solid earnings growth against inflation fears. Volatility can arise when the market shifts focus from one aspect to the other.
- We hold cash across our various portfolio strategies in order to be ready for volatility. We are continuously searching for opportunities to put this cash to work. Our goal is to take advantage of volatility and dislocations when they arise.
- Beware of media headlines screaming of point losses in the Dow Jones Industrial Average. The 1,000+ point drops this Monday and Thursday are the largest one-day point drops in history, but neither ranks among the largest 100 percentage drops in history. Last Friday the Dow Jones lost over 600 points, more than Black Monday in October 1987. The difference? Black Monday was a 22% collapse, while last Friday was a 2.5% pullback.
- Lastly, and most importantly, each of our clients is invested in an asset allocation that is appropriate for their financial circumstances. Those that can and want to take on more risk are invested more aggressively, while those that are more balanced or conservative are allocated more defensively.
It is impossible to call the tops and bottoms of market movements, therefore prudent asset allocation and a steady hand through market gyrations are essential for long-term success.
Tom Searson, CFA