The water cooler topic of the week has probably been the dramatic movements downward in the stock market. It’s been a wild ride, that’s for sure. While scary, we hope to provide proper perspective.
Market volatility has been historically low now for the better part of the past year. Not since the Brexit vote in June of 2016 had we seen such a large and swift move downward. The decline that started late last week, as of the close on Wednesday, has only erased the market gains of the past 4 weeks. The overall market, as measured by the S&P 500, still sits slightly higher on the year, and over 5% higher than last summer.
It’s easy to get caught up in the headline of largest declines in many years, but the gains have also been incredibly large over a short period of time. Typically, it’s not unheard of to see 5%, or even 10-12% corrections during a calendar year. We believe that this decline is just that, a healthy correction. Here is a good tweet by noted economist Brian Wesbury that highlights why we believe that.
Brian Wesbury Verified account @wesbury Feb 5
“260 of the S&P 500 have reported and earnings are up 16.4%!!! Ex-financial earnings up 18.7%!!! Economy accelerating. Tax cut working. Yes….this is just a correction!”
The bond market has been declining, something we’ve been detailing over the last several weeks. The bond market is the largest market in the world. The economy is doing so well, that the Federal Reserve is now believed to have the greenlight to raise interest rates more than originally anticipated. This is causing some jitters, and is likely the catalyst for the decline in stocks.
It’s the fact that the economy is accelerating that is actually causing the incredibly sharp rise and recent fall in the market. This is a far better reason for volatility than if we were seeing rising unemployment and declining consumer sales.
The global economy has just started to get in sync with one another. It hasn’t been this way, from a positive perspective, in over 10 years. We don’t believe that it will suddenly be derailed. In fact, data is showing that things are accelerating. We believe we are simply seeing some steam being let off from the large rise we’ve seen over the past 12-24 months.
As always, we continue to monitor things closely, and should things change to where we believe there is a fundamental shift occurring, we will take appropriate action to hopefully protect the downside of our clients’ account values.