You’ve probably been asking yourself lately, “What is going on with the stock market?” Despite a strong economy that has the lowest unemployment in decades, a strong dollar and GDP, and inflation that remains modest, the stock market has been enough of a roller coaster this year to have plenty of investors feeling queasy. Markets tend to not celebrate the current so much as look out into the future and are typically a leading economic indicator.
Years ago, I introduced the concept of the audio email to our office. Whenever markets were experiencing sharp declines or wild volatility, Brent & I would talk, sometimes for hours, examining the current issues that were causing those fluctuations. Then, Brent would spend time writing & recording a message to you. Well, lately, it seems like old times with the market moving sharply down one day, and then up the next, so now seems like a good time to speak with you about the issues contributing to the current situation.
Looking back, 2017 and most of the last decade, spoiled us by delivering very robust returns with almost no volatility. Markets typically experience a 10% pullback at least once a year. Last year, we not only didn’t experience a 10% correction, we didn’t even have a 5% decline. This year, we’ve seen volatility return with the markets zigging & zagging all year giving us the sawtooth pattern that you’ll see in the chart of the Dow Jones that we’ve included in the text of this email. The net effect for most investors has been a flat or slightly down year. If you’re feeling like you’ve lost ground this year, I’ve also included charts to show you the last 5 and 10 years, which really put into perspective how far we’ve come, with very little volatility along the way.
DJIA Trailing 1-Year
DJIA Trailing 5-Year
DJIA Trailing 10-Year
A couple of issues have been key contributors to this year’s nervous markets:
The talk of trade wars and the implementation of tariffs have rattled foreign markets. The U.S. and China are likely to continue the negotiation dance. In addition to trade, sensitive technologies will continue to be areas of contention. Each side has many incentives to strike compromises, but this may take some time.
In response to the strength of the American economy, the Federal Reserve has been raising interest rates this year, for the first time in several years. The FOMC meets today and will likely hike rates once again, but the consensus is that next year, there may not be as many increases as previously thought.
The current correction is not surprising or alarming to us. Market gyrations are not fun, but they are a normal, natural part of the investment process. What we encourage you to keep in mind is that within your accounts, you own many great companies that have been included in your investment portfolio because they have outstanding management and cultures. We are optimistic about their capabilities to provide growth, and income, over time. The value of those companies changes far less than the day-to-day prices. The dividends that many of those companies are paying, haven’t gone down, even if the current share price of their stock has.
We will be sending out a newsletter early next year with an expanded commentary on the economy and the markets. Until then, we want to wish all of you a warm and joyous holiday season. Thank you for listening.