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The Stock Market: Should you be worried?

February 08 2018
February 08 2018
MarketingProposal
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Another wild day today of trading in stocks has sent many into panic mode. While I don’t enjoy being the bearer of bad news, this bumpy and highly volatile ride could continue for a while longer.

But not to worry. The reality is that, over the long term, declines in markets are equalized by general uptrends. From what we’ve read and heard, the trick is to avoid making portfolio decisions based on emotions (we know this is hard) or short-term swings. So sit tight and strap on your seatbelt.

To help us put things in perspective, here is an email we received from managing director of The Ezzell-Conklin Group at HighTower Advisors, Jason B. Ezzell:

“I’m watching the overseas markets decline and see that the US futures are down by 2.50%.  This, on the heels of a decline in the Dow Jones of 665 and 1,175 points in the last two trading days.  We clearly couldn’t have annualized the returns of January 2018, and what started off as one of the top 5 beginnings to a calendar year has now turned negative.

Over the last 14 months, we’ve had many conversations around market returns, both equity and fixed income, and how those impact success ratios of long term financial planning.  And while I sit here thinking about rational, objective strategies to assist clients, I can’t help but think I’m not the only one concerned about the last few days.  Is this the beginning of a more meaningful correction?  Are the assumptions we’ve been using over the last 18 months, let alone the last decade, focused on the wrong things?  Is there something more nefarious behind this, and have the 14 months been nothing more than unfettered optimism without substance?  I don’t believe so.

A point of reference to consider to put this recent downward volatility in perspective:

We have experienced a sustained level of volatility in the past 14 months in the equity markets, let alone the last 8 years, the vast majority has been to the upside, the kind that most investors don’t mind.  In 2017 we saw segments of the global equity market provide dramatic rates of return:  S&P 500 +20%, Russell 1000 Growth +30%, MSCI EAFE EM +35%.  This rate of return is not the “New Normal” for the markets, and at some point, we should expect to see some level of repricing of risk assets such as these.

At the end of the day, we do not buy markets, we buy companies which provide strong earnings, cash flow, dividends, and the opportunity own leaders of industry, companies whose vision and strategy can positively impact our daily lives.  Most importantly, planning is the tail that wags the dog.  Our team spends an inordinate amount of time around portfolio design for capital driven by one thing, our client’s goals.  We understand markets do not move in a straight line, and there will be positive and negative market environments, sometimes extreme, that will impact success.

The goal of any investor is to be able to purchase discounted future earnings, and we are in an environment where earnings are growing, and growing at a greater than normal rate due to numerous factors.  The US economy is growing, and growing at a greater rate than normal, again due to numerous factors.  These are all positives to those of us investing for long-term growth, not trading day-to-day.

Please don’t think that I view the world or markets with rose colored glasses.  US Dollar money supply has fallen below nominal GDP growth, causing concerns over liquidity and corporate working capital balances.  The employment report on Friday, while again reflecting the strength of the US economy, provided some concerning data.  Although positively, some 200,000 jobs were added in January, above the 180,000 expected, wage growth came in at 2.9% YoY.  While in isolation this is a good sign, without consistent productivity gains, wage growth at this level can negatively impact corporate margins, and can contribute to inflation rising at a faster pace than expected.  Tack on a new Fed Chairman, and the concern of a miscalculation by the Fed on interest rate policy causes additional angst, contributing to uncertainty.  Additionally, the use of short-term trading strategies, algorithms, and quant trading strategies amplify intraday market volatility, as illustrated by today’s market movements toward the close.  Add the current geopolitical environment and the unhealthy political climate in DC, and it is easy to lose sleep.  Please understand that to some extent, many of these issues are always present, this period is not unique historically.”

Jason B. Ezzell, C(k)P, AIF®

Dated February 6, 2018

 

Disclaimer: All information and data on this blog is for informational purposes only. Although care has been taking in providing the most up to date information, we make no representations as to its accuracy, completeness, suitability or applicability to your personal situation. Thus, it should not be considered professional financial, tax, legal or investment advice. The ideas and strategies are based on our own options and should never be used without first assessing your own personal and financial situation and consulting a proper professional. All information is subject to change.


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