A Unique Market Perspective
At the recent all-time highs, the current bull market in U.S. stocks is the longest ever for the S&P 500 Index as the S&P 500 is up over 300 percent since it’s low in March of 2009. The markets were undulating like a yo-yo in October after reaching record highs in September causing some investors to naturally feel uneasy as the markets retreated almost ten percent as of November 1, 2018. As always there are many moving parts to the economy which lead to the bull market we have been experiencing as well as the bear markets that are a natural and healthy part of the markets. Even as the current U.S. economic expansion continues to lengthen, investors seem to be expecting signs of slowing momentum.
Last week I had an opportunity to meet leading U.S. Economist Ed Yardeni who used the analogy of his grandfather driving his car with a foot on the accelerator and the brake at the same time. The accelerator to the economy has been the U.S. stock market’s robust performance, inflation hovering around two percent and a record low unemployment rate. The likely brake on the economy is the Fed’s less friendly monetary policy with interest rate hikes and a very strong U.S. Dollar that hurts exports. Here are just a few of the schizophrenic workings over the past quarter.
• The Fed Funds increase in September was the eighth in this cycle as the Fed is gradually shrinking its bloated $4 trillion balance sheet. Could the recent rise in interest rates be an indication of doom for the economy and financial markets? I have read or listened to many prognosticators making the case that we are on our way to a recession. Fed Chair Jay Powell has clearly stated the Fed is acutely aware of the risks of moving too slow or too fast. Further, they seem focused on getting the Fed Funds rate back to the “neutral rate” of about 3.0 percent. This could be pragmatic as he would have something to work with to help curb the next recession.
• Even as the current U.S. economic expansion continues to lengthen, investors seem to be expecting signs of slowing momentum. Instead, we have seen solid data including +4.2% Q2 GDP, jobs growth, wage growth, solid durable goods orders and continued strong sentiment readings from businesses and consumers.
• One of the primary drivers of economic pessimism has been the potential outcome of the widely-discussed Trade Wars. A serious, long-lasting era of global high tariffs would surely dampen economic growth. However, the replacement of NAFTA by the new United States–Mexico–Canada Agreement (USMCA) may be an indication that Trade War rhetoric will be replaced by tweaked agreements. “USMCA” Doesn’t exactly roll off the tongue like “NAFTA” but if approved by Congress, I will start to figure out the pronunciation.
The Yo-Yo Effect
Staying calm amid market volatility is not easy for many investors. Fears of further decline can make investors feel skittish.
It can often be helpful to learn a different perspective, especially where finances are concerned. To help you with that, I’d like you to visualize a cute boy with a Bend Elks baseball cap on his head as he starts walking up the winding access road to Pilot Butte with a yoyo in hand. The undulating yoyo symbolizes the economy, real estate or stock market. As the yoyo goes up investors are elated. As it falls we begin to feel scared and depressed. As the yoyo starts its next ascent we celebrate with exuberance. Then before we know it, gravity takes over and the yoyo faces a downward spiral. Suddenly our stomachs begin to feel queasy with apprehension. It is up to each of us to choose whether we focus on the rising and falling yoyo or the boy. You see, they both reach the top of the butte with its majestic views of beautiful Bend at the exact same time.
So, let’s take that analogy and apply it to relatively recent history. October 19, 1987, is an ominous date known as Black Monday. The Black Monday decline was the largest one-day percentage decline in stock market history. The Dow Jones Industrial Average (DJIA) dropped by 508 points to 1739 for a 23 percent loss! Investors thought the end was near and fear overtook the financial world. Interestingly, the DJIA was not only positive for the 1987 calendar year but would close on December 31, 1987, at an all-time high of 1,939 points. Three decades later, the DJIA can now fluctuate in a single trading day by as much as Black Monday’s record-breaking 508 points. If someone had told you back then that the DJIA would surpass 26,000 in 2018, you would have thought they had lost their senses. Warren Buffet said it best: “It is almost impossible to do well in equities over time if you go to bed every night thinking about the price of them.”
Mr. Yardeni stated that over the last 100 years the U.S. stock market has experienced down markets in 30 of those years. He then went on to say that if there was a 70 percent chance of winning at the casinos, most of us would be there each and every day. The economy may continue its yo-yo like movement with ups and downs. But I feel it’s beneficial to remember to keep our perspective by learning from the past and rising to the challenge of the future. Peter Lynch stated: “Which way the next 1,000 to 2,000 points in the market will go is anybody’s guess, but I believe strongly that the next 10,000, 20,000 and 40,000 points will be up.”
David Rosell is president of Rosell Wealth Management in Bend. www.RosellWealthManagement.com
