Market Pulse: A stock market review
April 17, 2018
Stocks shook off some profit-taking in February then moved up only to fall amid worries about a trade war and the sharp sell-off in tech stocks, Facebook in particular. The S&P 500 retreated 10 percent from its late-January high.
Historically, drops of 10 percent happen almost every year so this retreat isn't too surprising. What is surprising is the extreme volatility, where Dow 100-point swings happen most every day. Compare that to last year when the S&P 500 never even retreated 3 percent!
Volatility is only high if you look at the market daily. Lengthen the time and volatility decreases. For the year the S&P 500 is about unchanged. Still, the unnerving volatility has investors asking: "Is this is a bear market?"
No. Here's why:
Let's first look at the answer from a fundamental perspective. Bear markets most often begin before the economy slows and enters a recession. With lower taxes and increased spending, the opposite is happening. Jobs are being created faster than expected and wages are ticking up. More than 800,000 people entered the workforce in February. Not since 1983 have so many people entered the workforce in one month.
We expect 3 percent economic growth by year's end. Earnings will be stronger still. Strong earnings should act as a tailwind so stocks could easily turn higher once earnings season arrives in mid-April.
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From a technical perspective, most major market tops occur after there is a negative divergence in a stocks-only Advance-Decline Line (i.e. S&P 500 moving higher while the A-D Line falls).
At the internet bubble top in 2000, the Advance-Decline Line fell for two years even as the market continued to reach new highs! That's not happening now. While the S&P 500's high came on Jan. 26, the Advance-Decline Line reached a new high on March 12. No warning flag here.
In a perfect world, stocks would work their way higher in orderly fashion with brief periods of profit-taking well contained. Alas, it is not a perfect world.
Moves like we've seen recently may be unnerving and reason for some without perspective to overreact and even swear off stocks forever. Their mistake. Most of us have adjusted and take the daily swings in stride. They hardly even make the news.
This is the way it is, and for a while this unfortunately is the way it will be.
David Vomund is an Incline Village-based, fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.