It seems that after a relatively quiet and positive 2017, that 2018 has seen the resurgence of volatility. Remember that markets are discounting mechanisms. This means that assumptions about the future are priced into current values. Market valuations of one year ago had priced into themselves an assumption about the coming year, in terms of economic activity, earnings, interest rates, and other quantifiable metrics. Since that time, we’ve seen the passage of the Tax Cuts and Jobs Act, and the imposition of tariffs among other things. Sometimes, it can seem as though a single tweet from the President can cause the market to move by several hundred points. What’s really happening is a re-pricing of risk as markets consider the degree by which previous assumptions about the economy change with new developments.
Relative to long term investment objectives, this is an opportunity and not time for knee jerk reactions. Those with shorter term investment objectives shouldn’t have had a large exposure to market risk in the first place. You must also consider the relative strength of the underlying economy. The four week moving jobless claims average hasn’t been this low since October of 1968. The ISM manufacturing index, and the ISM non manufacturing index continue to reflect strength and expansion. Housing remains strong. Non defense capital goods spending remains strong. Consumer confidence and CEO confidence surveys remain at or near record high levels. The underlying economic data in other words is robust. In light of that, I would suggest that those with longer term investment objectives view periods of volatility as buying opportunities, to acquire more shares of companies, at lower prices, dilute your cost basis in the process, and allow natural market forces to work for you.
Remember the objective behind your investment plan, the length of time between now and the realization of that objective, and the plan derived for pursing that objective. Also, remember that markets are often moved by factors that can’t be quantified on a spreadsheet. Opportunities manifest when fear over the perceived seems to outweigh that which is quantifiable. Lastly, recall similar recent periods of short term volatility for clues about what may transpire going forward. We witnessed a deep, and short lived market correction in February of this year. By the end of the first quarter, the markets had recovered to being nearly unchanged on the year.
Turn off the television. Such is a source of sensationalism, and it will continue to be so through the mid term election. The next 500 point decline isn’t necessarily the beginning of the next great recession. You can only discern the tip of the ice berg from an ice cube if you have a deeper understanding of how markets price risk, what events cause the markets to re-price risk, and an appreciation of the relative economic strength underpinning the market right now. Talk frankly with your financial advisor, and share your concerns but also listen to the dispassionate advice that you receive. You hire a financial advisor to have the intestinal fortitude to guide you through periods of time such as these when the markets seem to behave irrationally.
