Perspective on Current Market Volatility

U.S. stocks started a correction on October 4^th.

September, on average, is the worst month for stocks in the U.S. and October has a history of memorable volatility but it has also periodically served as the turn-around month for bad Septembers.

This year we dropped hard at the beginning of October, bounced a bit, dropped again and then had some additional support through the first week of November. Selling then resumed with volatility periodically spiking and then tailing off depending on the sentiment and news for the day.

Looking back to earlier in 2018, stocks outside the U.S. dropped decently at the end of January, then stabilized somewhat with a bit of downward bent and then started heading lower again pretty well in concert with U.S. stocks.

We’re well into an economic growth cycle that started when we left the bottom of the financial crisis in 2009. This cycle is officially longer than average but the financial crisis was an unusually bad economic period. Growth coming out of the crisis was slower than a typical recovery and well below historical averages. The U.S. government’s response after the crisis was to add lots of new regulations which challenged economic progress, shallowing the shape of this recovery compared to prior recoveries.

Europe recovered from the crisis somewhat, but it could be argued that with the bureaucratic overlay of the European Union, and the costs of socialism, they never fully recovered.

Italy, in particular, hasn’t gotten back to meaningful growth but their government is committed to spending money on social programs, risking its status as a member of the EU by violating rules of fiscal conservatism.

In the U.S. our economy couldn’t be much better, with unemployment at or near all-time lows. However, the kick we’re currently experiencing is in part fueled not only by tax cuts but a commitment to increasing the size of our government, an unusual move given where we are in the economic cycle.

On the opposite side of our political spectrum the response might be to spend even more taxpayer money but with different priorities attached. The discussion from our representatives seems to focus more on ideology than economic sustainability.

Trade tensions are hurting profits and global economic growth.

We’re also in a rising interest rate environment in the U.S. causing borrowing costs to increase. This rise in interest rates has hurt bond performance as well.

Risks to the system are more evident just now than they have been for several years.

The stock market reacts very quickly to changes in potential outlook. It’s been proven that most people react about twice as strongly to loss as they do gain. As markets moved higher over the last years we may have not felt like celebrating, and possibly muted our positive feelings with caution, concerned that the next downturn may be just around the corner.

However, there’s no means of predicting when it’s best to embrace market volatility or when to get out of the way. Without owning some volatility, stock market gains, which are the engine of portfolio growth, cannot be had.

One can guess about when to reduce or add volatility to a portfolio. Those actions, which might relieve psychological pressure and feel good in the short term might also have devastating consequences for the long term. We’ve seen it happen.

For the average person focused on accumulating wealth, and reaching a point where they are able to retire, participation in the stock market will be a constant for a majority of their life, many decades.

Economic cycles are normal. Stock market volatility, including sharp painful corrections, is normal.

It’s never fun, but it is normal to have periods of wealth compression followed by rebounds and portfolio growth to new highs.

During periods of increased volatility, opportunities may arise to buy discounted assets. Conversely, sales at distress prices are to be avoided. This is just an affirmation of our core belief in building enough safety into a portfolio to meet spending needs during a downturn while avoiding the need to liquidate securities at low prices.

We consider our clients need for safe assets as a matter of course, but if you want to review your individual situation with us please let us know.

We don’t know exactly what the coming months will bring, but a commitment to long-term investing will remain our guide.