Market Pulse: Here we go again
November 8, 2018
The market volatility continues day after day much as it did in February. Down 600 points, up 400, down 400.
Moves of this magnitude are usually amplified by just a few stocks and very clearly fanned by trading operations tied to algorithms. On Monday the Dow lost 245, but the drop in Boeing accounted for 150 of those points.
Long-term investors shouldn't be rattled by volatility. In fact, it creates opportunities. Others who trade actively are a different story. They emotionally react to the swings and all they hear and read. I can see why.
Investors have a lot on their plate. A few concerns: the budget crisis in Italy, the collapse of stocks and slowing growth in China, the sell-off in U.S. industrial, housing and now tech stocks, troubled relationships with Saudi Arabia and Turkey, falling markets in Europe, Brexit, slowing global growth, high debt levels here and abroad, the dollar, tariffs, and of course the prospect of rising interest rates.
The bull market’s ultimate end will come well before the next recession and I don’t see conditions that would lead to one. Periods in which the GDP growth rate slows (called growth recessions) are typical and we’ll see one in 2019, but growth is still growth.
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Investors briefly focus on one problem, then on another and another. It's free-floating anxiety.
Most stocks are down for the year. In fact, half of the S&P 1500 stocks are 20 percent or more off their yearly highs. Worried investors note that profits are decreasing. Not true. Profit growth is decreasing. Profits are still up, 20 percent this year thanks to the corporate tax cut and 5 to 10 percent next year.
The bull market's ultimate end will come well before the next recession and I don't see conditions that would lead to one. Periods in which the GDP growth rate slows (called growth recessions) are typical and we'll see one in 2019, but growth is still growth.
October is historically one of the worst months for the market. Seasonal patterns now turn positive. According to Jay Kaeppel (www.jayonthemarkets.com) November through April on mid-term election years is bullish for stocks. Since 1942, the Dow has gained an average of 15 percent during those six months.
Again, though it is at times hard to do when you see stocks up 500 points then down 600, investors should focus on the outlook for profits rather than geopolitics and umpteen potential problems
Profit growth of 5-10 percent next year is very realistic and there are macro reasons to be optimistic well beyond next year. That's a good enough environment for stocks. Along the way we are likely to see market swings similar to this October. We'll live with it.
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.