“There you go again…”
Famously uttered by Ronald Reagan in a 1980 presidential campaign debate, this phrase sums up what many are feeling as they watch recent action in global stock markets. Monday’s 4.6% drop in the Dow Jones Industrial Average certainly was dramatic (although nowhere near record-breaking), and headlines once again are fanning the flames of falling prices. Then today, following sharp initial swings, a rebound ensued, with the Dow gaining 567 points, or 2.3%.
It’s important to remember that financial markets are, in the words of the “Father of Value Investing,” Benjamin Graham, “voting machines” in the short run—in other words, subject to fickle whims of popularity and public opinion. Over the past years, financial markets have been unusually tranquil, as measures of volatility have repeatedly been at record lows. So, when waters are now suddenly choppy, it seems particularly jarring—a behavioral human response known as recency bias. What seems so disconcerting is really just the return of normal volatility.
On February 2, the Department of Labor released a surprisingly strong jobs report, showing 200,000 jobs created in January and the unemployment rate holding at a low 4.1%. Embedded in the data was another positive surprise—wage growth of 2.9%, the best since June of 2009. In reaction to strong economic data, bond yields jumped, with the 10-year U.S. Treasury moving above 2.8%, a level not seen since 2013. And so, in a knee-jerk response, stock markets began a sell-off, as fears of higher inflation leading to a more aggressive Federal Reserve took center stage.
What does all this tell us? Honestly, not a whole lot. The economic backdrop remains quite positive across the globe, and corporate earnings and margins remain healthy. Optimism in corporate America is high in light of recent tax reform, with many companies announcing plans for investments, worker wage hikes and future growth initiatives. So, in the often perverse way that markets work, Friday’s good news led to a rapid reconsideration of future interest rates and a subsequent rapid repricing of stock valuations. Market analysts suggest that much of the late session volatility was caused by index and ETF rebalancing, which creates real price movement but is not indicative of fundamental economic issues.
So, as we have said many times, market movements in the short-run are unpredictable. Stocks have gained substantially since the depths of the 2008/2009 financial crisis. Periodic bouts of volatility are to be expected. Carefully chosen asset allocations are the best antidote to such volatility, in that they allow financial plans to remain on track. Deviating from those plans, and reacting to short-term market movements, is damaging to long-term returns.
As always, please contact your advisor with any questions. Our team is here to help you stay on course and achieve your long-term goals. On behalf of the Investment Committee and all of us at JFS, we value our relationship with you and appreciate your continued confidence.