1Q2018 | All Ages
In 2017, the largest peak-to-trough decline in the S&P 500 was just over 3 percent – an almost unprecedented lack of volatility. These conditions were bound to ultimately shift, and with the amount of automated trades that were triggered during the reversal, we saw quite a spectacle in the Dow in the beginning of February, which at one point was down more than 1,500 points. This irrational behavior is typically is short-lived, and generally should not drive long-term investment decisions.
It is important to understand that market corrections are a normal phenomenon, and investors who know the facts, remove emotion and react (or don’t react) appropriately normally are the biggest benefactors.
In times of volatility, it can be very difficult for some investors to remain focused and disciplined as an investor. Emotions become volatile, and history has shown two common resulting behaviors for individual investors:
Investors who panic and make rash decisions often make mistakes that they never may be able to overcome.
For example on March 9th, 2009, the S&P 500 hit a low, down 57 percent from its all-time high. From that point forward, the market moved up over 300 perecent. Unfortunately, many investors never re-entered the market and missed out on potentially doubling or tripling their money (depending on their exposure to equities).
Portfolios of investors who stick to their plan for the long term, generally outperform portfolios of those who do not. Keep in mind this famous quote from Warren Buffett:
“When investors get greedy, I get afraid. When investors get afraid, I get greedy.”
As we’ve watched the market over the last several trading sessions, we have continually asked ourselves “has anything fundamentally changed from yesterday to today? Or even last week to this week?” Every time, our answer is a resounding “no!”. We view this pullback as healthy, and frankly overdue. We still feel the equity markets is the best place to earn a decent return in 2018, and is still bullish on stocks. The backdrop is still very positive for the equity markets: earnings continue to grow at a robust pace, with approximately 80 percent beating estimates, inflation is low to non-existent, interest rates (credit) are still very cheap by historical standards, tax reform should boost corporate profits and consumer spending, and the global expansion is still very much alive. None of that changed between last week and today.
The catalyst for this sell off really surrounded around inflationary concerns. Inflation has been essentially dormant for the last several years, and despite a low unemployment rate, although wage growth has struggled to get off the ground. That finally showed signs of change in Friday’s jobs report, as wage growth was up 2.9 percent year-over-year, the highest gain since June of 2009. Growing wages coupled with the added stimulus of tax reform have caused some traders begin to price in the possibility of the economy overheating, prompting rapid action from the Federal Reserve. While we do expect the Fed to continue raising rates this year, we still are at historically low levels with cheap credit readily available to businesses wishing to invest in growth. Any inflation experienced from a rise in wages would have a lagged impact before the economy and inflation areaffected. We also believe tax reform will lead to inflationary pressures as will the normalization of the Fed. But we feel these inflationary pressures will start impacting the economy in the second half of the year, likely in the fourth quarter.
As anxious as investors may feel from day to day, we would urge you to remain disciplined during these periods of turbulence and stick to a long-term approach driven by fundamentals rather than respond to short-term events. We will continue to monitor economic conditions and make adjustments as necessary, but we remain confident in our strategic allocations. We recognize that media-driven hysteria can put investors of all experience levels on edge, and our advisors stand ready to visit with you regarding any questions or concerns that may arise. Thank you for your continued trust!
Eric Krause, CFA
Securities offered through Cambridge Investment Research, Inc., “Cambridge,” a Broker/Dealer, Member FINRA/SIPC. Advisory services offered through Prime Capital Investment Advisors, LLC. “Prime Capital,” a Registered Investment Advisor. Prime Capital doing business as Qualified Plan Advisors, “QPA,” 6201 College Blvd., 7th Floor | Overland Park, KS 66211 | p: 913.491.6226 | f: 913.491.3214 | primecap-ia.com | Cambridge and Prime Capital are not affiliated.
This commentary is provided for information purposes only and does not pertain to any security product or service and is not an offer or solicitation of an offer to buy or sell any product or service.