It’s easy to be complacent when economic conditions are good and the market is rising without interruption. But, as we know (but often forget), markets don’t go “Up & Up.” Markets are inherently volatile and will vacillate between “Up” and “Down,” but, over time, will tend to trend upward. Good or bad, this is the essence of how markets have operated over the course of the last few centuries.
Historically, pullbacks of 5% have occurred almost once a quarter through modern market history. Deeper corrections of around 10% have happened, on average, close to once a year. But, we have been “spoiled” lately, experiencing the longest period of increasing stock prices (“Bull Market”) in history!
Still, when you have a couple of days where we see stock prices plummet sharply, it gets our attention! And, whether markets are moving upward or downward, there is never an absence of something to worry about. But if one believes (as I do) that, over time, markets are reasonably “efficient,” short-term fluctuations are just that – “short-term.” And, keeping this in perspective is really, really important.
History has also shown that equity results have been largely driven by fundamentals – primarily consumer spending, which leads to earnings growth. As long as people are still spending money, we tend to experience positive returns from stocks. Since markets have the tendency to look forward rather than backward, increases in downside volatility are often focused on possible threats to earnings.
Today, those threats are higher interest rates, higher gasoline prices and continued worries about U.S. trade policy – namely tariffs. Each of these issues has the potential of reducing consumer spending, which, in turn, would reduce earnings. Think about it: if you and I are spending more to service our debt, and paying more to fill up our gas-tank, and some of the products we purchase cost more because of tariffs, we’ll all have less money to spend in other ways and on other goods. This begins the slow-down of the economy and, consequently, would be reflected in lower stock prices.
So, is this the beginning of the end?
Not in our opinion. We believe that this is an expected “speed-bump” in the current economic cycle. Not surprising, but not without a little “pain” either. The fundamentals in the economy are still very good – historically low interest rates, record low unemployment and low inflation. So, we’re not panicking right now . . . . . and neither should you!