Headlines Matter Again for Investors
Recall our theme for 2018 has been “Making Volatility Great Again”. The past two months certainly fit the bill. How did we know? It’s not too difficult when 2017 was the least volatile stock market on record. The largest pullback in the US stock market (S&P 500 Index) was approximately 3%. There were barely any daily 1% moves up or down for the S&P 500 during the year. The VIX, a volatility index, set record lows as volatility all but disappeared. However, investors should realize that 2017 was not normal.
Fast forward to 2018. Rising interest rates, turnover in Trump’s administration, tariffs and Facebook privacy issues have investors a little on edge. But guess what? It is normal for headlines to cause a reaction in the stock market. Below is a chart that analyzes market pullbacks. On average, the S&P 500 goes up or down by 1% 60 times per year (source: JP Morgan Asset Management). There have been 22 1% moves so far in 2018. 5% corrections occur on average 4 times per year. This year it has happened twice.
The news has not caused us to change our investment outlook as fundamentals remain healthy. Corporate earnings are rising. Tax cuts and the recent spending bill will be stimulative. Global economies are growing, and commodity prices have stabilized. This should help support risky asset prices. The next bear market likely coincides with a recession. Unless we see a shock to the economy, the odds of a recession are low for 2018. The Fed is slowly raising rates and taking away the punch bowl, but we believe this is more of a worry in 2019. Our best case assumes the tariff spats between the US and trading partners will not develop into a full-fledged trade war. We also do not expect returns from a diversified portfolio to mirror those from 2017 as valuations for most asset classes are above average.
* * * * * Jon Giordani is Chief Investment Officer for PSG. He provides innovative investment planning strategies to our clients. * * * * *