Markets reached new all-time highs in January with almost non-existent volatility that lasted over fifteen months. Money flowed into stock investments in record numbers as the new year began. It all changed abruptly.
Attention changed overnight from good corporate earnings, low unemployment, and a steady economic growth rate to inflation, rising interest rates, and a trade war with China. Volatility exploded to the upside and equity markets shed over 10% of their value and by definition marked an official “correction”. Many companies fluctuated 3-4% daily following this rise in volatility and the fear that markets had grown too fast and too long without a pullback. The technology stocks were the most volatile during this period.
Many investors reacted to the decline by selling their shares in fear of another setback as in 2008. Volatility calmed down again and we have witnessed share prices rebound with some right back to new highs. The hardest hit technology sector has recorded the swiftest and most powerful rebound. The small and mid-sized companies have held up very well also, mostly due to them not being affected as much by the threat of trade tariffs since they mostly deal and sell in the United States.
As the most recent earnings period comes to an end, corporations have again beaten their earnings and revenue forecasts in record numbers. The inflation numbers have settled down and in recent Federal Reserve meetings they have opted to leave interest rates alone for now. While we expect 1 or 2 more rate increases yet this year, raising them too quickly can cause economic growth to stall quickly. Our dollar strengthening recently will favor U.S. stocks over international stocks in dollar terms.
Reviewing the various investment sectors currently, we find that the domestic small and medium sized companies continue to outperform. The more aggressive growth style companies are performing better than the more conservative value style companies. Real Estate and the bond funds have recently rebounded a bit after struggling since interest rates started their rise late last year.
Although the short term market values can be easily affected by political and world events with the results unknowable, the strength of our economy and the businesses that make up the economy make a strong case for continued growth in their valuations.