What’s going on with the stock market after last week’s ups and downs?
It was a bumpy ride last week. On Monday, we watched the market extend a decline it started the week before. On Tuesday, the indices recovered some of the losses, and Wednesday was pretty call. Then on Thursday and Friday, the selloff continued, and officially became what we call a market correction, which is a decline of 10 percent. All of this movement has some people feeling a little queasy, so today I want to talk about why we are seeing this turbulence on Wall Street.
Why are we seeing this volatility?
There are a number of factors at play here. In recent days, strong wage growth and low unemployment have sparked concern about inflation fears, and concerns about higher interest rates and high stock prices have investors skittish. On top of that, I think we are watching the market digest some of the global volatility we continue to see around the world.
In the last few years, the world has seen numerous unsettling developments – we have seen Brexit, serious nuclear rhetoric with North Korea, a government shutdown, partisan gridlock in Congress and increased potential for trade wars, among other things – and yet the stock market has been remarkably calm and unaffected. Together, all of these factors increase uncertainty, and dampen some of the unbridled optimist we have seen until now. As a result, investors have grown more cautious, and the stock market has entered a correction.
We are now seeing correction. Does that mean we are likely to continue to see the market decline?
It is a fool’s errand to try to predict the markets. And I do not think that we are necessarily going to continue to see a decline. That said, I do think we will continue to see volatility. The last few years have been unusually calm on the markets. In 2017, there was not one day of trading during which the market declined more than 2 percent. Not one. In 2011, there were 21 days.
This week, the volatility index hit the highest level since 2011, so I expect we will see more bumps going forward. And yet, while there are some reasons for caution, the fundamentals of the economy are strong. We continue to see steady GDP growth here and abroad, and the earnings reports so far this quarter have been great. Of the half of the S&P 500 who have reported earnings, 80 percent have beaten Wall Street’s expectations! The companies in the index are on track to grow revenue 7.5% and earnings 13% from a year earlier. Bull markets do not last forever, and this correction was bound to come. That said, do not think investors should be worried.
What does this tell us about the current economy?
Stock market performance and economic performance are correlated, but they are not necessarily linked. Investors look ahead to the future, and over the last week, investors seem to be expecting higher levels of risk on the horizon, whether it is high stock price to earnings ratios, political issues such as higher deficit or gridlock in Washington, or geopolitical issues like North Korea. All of these factors can affect the markets while not necessarily affecting the economy. Put simply, the stock market performance is an indicator, but not a measure of the economy.
What is your advice for our listeners at this point in time?
Keep your eye on the horizon and ignore the waves. We are likely to see a period of ups and downs on the markets in the coming weeks and months as investors and companies adjust to the changing circumstance in the economy. In tumultuous times, the best thing that you can do is stay the course. You want to continue to regularly contribute to your retirement plan and resist the urge to make changes or react to the daily changes. Remember, you are invested for the long-term. Short-term volatility should not be part of your calculations.
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