Any Class III rapid worth its boulders ought to be a little scary and a little fun at the same time when going through it. The last five days, especially the large point drops in the Dow over the past two days, have been a lot more scary than fun for many. What is often forgotten about investing is that market volatility presents opportunity and is good for the long-term health of the market and economy. For many investors, that opportunity is commonly realized when dividends are reinvested into their respective strategies, buying additional shares at lower prices. For those who have some cash on the sidelines, days like the last few might also represent tactical opportunities.
We’re reminded of a favorite analyst’s saying: Panic is not a strategy. Stick to your discipline, allow as little emotion into the mix as possible, and adapt when clearly prudent to do so. What about the long-term? Well, once again we turn to the Conference Board’s Leading Economic Index, the current release (dated 9/20/18) reads:
“The leading indicators are consistent with a solid growth scenario in the second half of 2018 and at this stage of a maturing business cycle in the US, it doesn’t get much better than this,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “The US LEI’s growth trend has moderated since the start of the year. Industrial companies that are more sensitive to the business cycle should be on the lookout for a possible moderation in economic growth in 2019. The strengths among the LEI’s components were very widespread, further supporting an outlook of above 3.0 percent growth for the remainder of 2018.”
Our paraphrase: the economy remains fundamentally strong, with a possible slowdown in 2019. Yes, this is an old bull market, and yes, as yields rise price compression will affect US Treasuries and other fixed-income securities. But these are observations that have been made numerous times over the last two years. In fact, the current spate of volatility feels a bit like February of this year, largely forgotten by most, when we wrote of a wildly swinging market in response to good economic news.
A correction is defined as a 10% drop in the market, which for the DJIA, would equate to about 2,700 points from its recent high. Are we on our way to a correction? Nobody knows. While stocks are perceived to have fallen predominately as a result of rising interest rates, it isn’t just US rates that are in play but rising global yields combined with non-systemic concerns such a political and geopolitical uncertainty.
This being said, we will experience volatility. Inevitably, a bear market will arrive (defined as a 20% drop in the market), perhaps followed by an economic recession, though only time will tell whether this has begun or won’t begin for years. This will be followed by another bull market and another economic expansion. Such is the cyclical nature of economics, and such is life. In the light of these long-term realities, we remain optimistic and will hold to our long-term disciplined approach to managing portfolios in a balanced and diversified manner, rather than react to short term market volatility, recognizing that nobody knows when the ups and downs in the market may occur.
As always, we welcome your thoughts and feedback. If you’re reading this as a client of ours and your circumstances have changed in any respect (e.g. time horizon, liquidity needs, feelings on the subject of risk), we would like to hear from you. Please give us a ring if you’d like to chat.