I know the market volatility/decline may cause some of you to be nauseous! Frankly, with the recent market decline, the Jan-March quarter will be the first negative quarter of the last ~ 10!  In fact, the broad S&P 500 Index was positive for ~ all 12-month last year. The negative months of Feb/March this year are unpleasant to see as we are not accustomed to having our account statement balances decline, are we?  We need to get familiar with these declines as volatility is likely here to stay; this is normal and may be a good sign as the US economy continues without the help of government stimulus (“printing money” adding to our debt) which artificially reduced market volatility.

Keeping perspective suggests you consider that the broad US market (S&P 500 Index) is only down ~1% year to date through March (before dividends) despite the volatility. Additionally, over the last 12 months, the market is up ~ 12% with most clients capturing ~50% to 120% + of this gain, (depending on your custom Investment Policy, investment timing, etc.) which equates to ~ 6 -15 +% investment returns, net of all fees, over the last year, including the recent declines of the last 2 months.   Of course, these returns are far superior to mostly cash and or fixed income/bonds which have trended negative. 

The rapid market swings and declines in Feb. and March, enhanced by computer trading, have more to do with several event risk factors, and less with any fundamental economic reason; corporate profits remain strong, interest rates low and the US dollar stable.

If you recall, the market decline in February was sparked by an overreaction to a rapid spike in interest rates and further exacerbated by technical parameters (think market trend investing) and mechanical selling/computer trading, a root cause being the failure of market insurance hedge instruments (confusing, I know). The market almost fully recovered but the tariff scare, likely a negotiation tactic, driven by the political media, rocked markets with additional pilling on due to the Facebook (FB) breach. This led the market to re-test the February lows. The market rebounded (likely magnified by computer trading again) but was followed by a sharp technology-based decline related to key products used in self-driving cars (recall the Uber/Tesla accidents?). During this period, there has been no real change in the important fundamental data that truly drives stocks and markets. Interest rates are now lower than they were, “tariffs” will be negotiated, Facebook will start “behaving”, and the development of the self-driving car is not going away! 

These event risks, in the absence of new positive data with a backdrop of increasing rates, gave sellers a reason to take some profits. However, the good news is that the stock market generally looks forward and not back; we should too as we anticipate increasing corporate profits over the next couple of months and into the balance of the year. 

Steve Erken, CFP®

Principal

March 30, 2018