Market

Insights

Since World War II, there have been 11 U.S. economic recessions, 12 Bear Markets, and 23 U.S. equity market corrections of at least 10 percent. The catalyst for these declines includes geopolitical events, terrorist attacks, credit market collapses, and various asset bubbles, among others. The underlying cause of a significant decline in economic activity or equity market prices changes throughout history, but the stages we experience through those declines remains the same. As we have mentioned often in past commentaries, Uncertainty for the equity markets leads to Fear, which ultimately results in significant short-term volatility and temporary price declines. These events are, in part, exacerbated by the relentless barrage of media sensationalism.

This past week we have witnessed the significant decline in the market indexes in response to fears of repercussions to the world economy from the spread of the coronavirus. As in almost every sharp market decline of the past, fear commands the human emotion to panic and in the case of investing, sell now and ask questions later. More recently as technology makes trading simpler and allows mathematics to control trading decisions, market moves are quicker in either direction.

History will document that 2019 brought us above average investment returns in most sectors, and also brought worldwide trade wars, political infighting, natural disasters, well known corporate closures, major technological advancement in communication and medicine to name a few. The U.S. economy is continuing to expand at a moderate pace and unemployment numbers are at record lows. As long has been the case, consumer spending is what is keeping the economy growing. The share of internet sales continues to rise versus the big box store sales. What is bought, how it is bought, and how it is paid for is changing minute by minute. Consumers are clearly spending their pay at a healthy clip creating the jobs that keep the economy humming.

Recent developments in the financial world have led to significant discussion regarding an Inverted Yield Curve and a looming recession. Equity markets around the world responded with a decline in prices. Economists, former Federal Reserve Chairpersons, market pundits, and every individual that can get in front of a camera are offering their opinions – some are qualified and some are not.

As the year 2018 comes to a close, we reflect back on the past forty years that we have witnessed first hand in this investment business. What stands out most vividly in memory were the major declines. Most of us that experienced the “crashes” in 1987, 1990, 2002, and 2008 would agree that in each decline there was the feeling of dread for what each new day would bring. Coinciding with each crash was either political turmoil, global tensions, or some type of financial industry corruption. In more than one instance, it was all three. “Financial analysts” on television grabbed the limelight with prognostications of markets going to zero as markets imploded and the world falling into the abyss. Quite scary times to be an investor.

The term “climbing a wall of worry” has been used for decades to describe how stock markets continue to rise in value as negative events, both domestic and worldwide, dominate the news. This seems to be the case this year as negative news monopolizes our daily lives including: tariff threats with our international trading partners, polarized political infighting here at home, Brexit struggling again, and recently immigration issues. Equity markets have run up to new highs right into October.

Something very interesting has been happening to the S&P 500 Index. It has just completed an unprecedented string of continuous records. The index closed at new highs each day of the past week, each week in the past six, and each month in the past seven. Never before has this feat been accomplished.

As we pass the midpoint of 2018, cross currents are evident in every market sector as well as worldwide which continues to keep investors on the sidelines. Even professional money managers have cash holdings in excess of the 10 year average. It seems as if the overwhelming consensus is that the equity markets are bound to have a major decline. Cash is being hoarded at next to nothing returns waiting to swoop in and buy shares more cheaply after the supposed decline.

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.

The economy here in the States, as well as the rest of the developed world, continues to improve. In the fourth quarter of 2017, 70% of all companies reporting beat their earnings forecasts and nearly 72% beat their revenue forecasts.