Last week was another volatile week for the stock market. However, the fundamentals that underpin the stock market still appear to be supportive for growth. The Purchasing Managers Index (PMI) for the services sector of the economy held steady at 53.3 last week. A report above 50 indicates growth and a report below 50 indicates contraction. This measure was confirmed by a separate report put out by the ISM, which indicated the non-manufacturing sectors of the economy continue to expand, with its index rising to 59.9.
Interest rates have risen quickly thus far in 2018. Through February 9th, interest rates on the 10-year US Government rose 41 basis point, or 0.41%, to approximately 2.83%, which represents an 18% increase in rates since the end of 2017. Many pundits and investors fear the rise in long-term interest rates is due to rising inflation and therefore will lead to a tighter Federal Reserve. We believe however, that rising long-term interest rates signal a strong economy and that inflation will remain controlled.
At times like these, emotion grabs investors by the throat, and it can be difficult to recall markets and economies tend to move in cycles. Historically, bull markets lead to bear markets, which lead to bull markets. Likewise, economic expansions are followed by contractions (recessions), which are followed by expansions.
Key points for the week
- Many global stock markets reached correction levels by falling more than 10 percent before rebounding on Friday.
- Fundamentals remain strong, although inflation risk is rising.
- Successful investors manage their emotions.
- The volatility we are experiencing will likely continue. That doesn’t mean markets will go down, but we should prepare ourselves for big moves higher and lower. We should also expect more swings throughout the day. Volatility tends to come in clusters, and we are coming out of a period when markets were unnaturally calm.
- A comment made last week – Market are not being tested, investors are.
Fear and Greed.
We looked at the spike in the volatility index last week signaling a surge in fear. Another index we tracked also signaled extreme fear last week, which tends to be a contrarian indicator. Warren Buffet is famous for saying there are two types of fear:
- The first is general fear, which is a good sign and allows investors to take advantage of mispricing in the stock market.
- Second, is individual fear, which should be avoided or at least managed to limit the impact of emotions on investing decisions.
This mantra is summarized by Mr. Buffet’s famous quote, “Be fearful when others are greedy and be greedy when others are fearful!” We will not know if the worst of the recent correction is behind us until after the fact, but the extreme fear recorded last week signals that this may be the case. Be mindful to take advantage of the first type of fear and do your best to avoid the second type of fear.
Market Downturns are not a Destination.
Markets and economies are cyclical. For instance, from 1945 through 2009 (the start of the current expansion), the United States experienced 11 economic cycles. The average recession lasted for about 11 months and the average expansion persisted for about 58 months, reported the National Bureau for Economic Research.
After the recent market decline, many people are concerned the bull market may have run its course, and a bear market may be ahead. Since bear markets usually mark the beginning of recessions, let’s take a look at what some leading financial companies and publications have to say about their expectations for 2018:
“The U.S. expansion is on course to become the longest on record, stirring concerns it is about to run out of steam. But is it? The recently enacted tax overhaul and higher federal spending could add 0.8 percentage point to U.S. GDP growth in 2018, we estimate. This could tip the balance toward accelerating growth. Such a boost could shorten the cycle’s expiration date to two or three years.”
--BlackRock Investment Institute, February 7, 2018
“Most analysts think that while profits are growing and the economy is healthy, the stock market will be supported. But there is scope for a lot more choppiness as investors await the Federal Reserve’s rate decisions and look for data to indicate whether inflationary pressures are rising.”
--The Economist, February 8, 2018
“Perhaps the over-arching risk is complacency. While the current conjuncture might appear to be a sweet spot for the global economy, prudent policymakers must look beyond the near term…The next recession may be closer than we think, and the ammunition with which to combat it is much more limited than a decade ago, notably because public debts are so much higher.”
--IMF Blog, January 22, 2018
“While we expect volatility will be higher this year than in 2017, with company fundamentals looking solid and synchronized global economic growth set to continue, it seems reasonable to expect that stocks will move higher over the coming year.”
--J.P. Morgan Asset Management, February 5, 2018
“An overheating global economy could mean a more rapid shift by central banks to rein in stimulus, often a precursor to recession. Yet, we still believe a recession is not on the near-term horizon.”
--Schwab market commentary, February 9, 2018
Forecasting is a difficult task. Time will tell.
What are we reading?
Below are some areas articles we paid particularly close attention to this week. We encourage our readers to follow the links.
Be Wary of Pepco Scammers. Pepco released a press release warning D.C. and Maryland customers of a popular “green dot” scam. This scam is targeting commercial and residential customers. The fake calls claim that customers are behind on the account and must make immediate payment to avoid having their electric utility service cut-off. Customers are asked to purchase a pre-paid debit card and call a number to pay using this card. Scammers are replicating Pepco’s phone numbers. Never provide Social Security numbers or bank information. If you receive a similar call, hang up, and if you are unsure call Pepco back on a known number.
Budget Deal Reached and Some Tax Changes. Last week, President Trump signed legislation to fund the US Government for the next two years. The bill increases military spending and will likely increase the federal budget deficit. In addition, the bill also extended many tax provisions that had expired at the end of 2016. Notably, immigration reform was left out of the bill.
Story of the week
Olympic athletes never fail to bring us some of the most amazing stories, and the very first African bobsled team is no exception. Seun Adigun, captain and creator of the team, and two teammates quit their jobs to try out for the Olympics and make history. Adigun created a GoFundMe page describing the team’s goals and constructed a wooden trainer bobsled herself. Not only did the bobsledders enter into the trials, they qualified. This is one of the most intriguing stories in the Winter Olympics and caught the eye of some big-time sponsors, including Visa and Under Armour, who are funding their trip.
Weekly Focus – Think About It
“Stock market goes up or down, and you can't adjust your portfolio based on the whims of the market, so you have to have a strategy in a position and stay true to that strategy and not pay attention to noise that could surround any particular investment.”
~ John Paulson, Investment manager
"Mistakes are the portals of discovery."
~ James Joyce, writer
"All our dreams can come true, if we have the courage to pursue them."
~ Walt Disney, Cartoon Artist and Producer
"Only those who dare to fail greatly can ever achieve greatly."
~ John Kennedy, 35th U.S. President
Links & Disclaimers
RJFS and SPC do not offer or provide legal or tax advice. Tax services and analysis are provided by the related firm, S&M through a separate engagement letter with clients. Portions of this newsletter were prepared by Carson Group Coaching. Carson Group Coaching is not affiliated with RJFS, SPC or S&M. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. This information is not intended as a solicitation of an offer to buy, hold or sell any security referred to herein. There is no assurance any of the trends mentioned will continue in the future. Any opinions are those of the author and not necessarily those of RJFS. Any expression of opinion is as of this date and are subject to change without notice.
Opinions expressed are not intended as investment advice or to predict future performance. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Past performance does not guarantee future results. Investing involves risk, including loss of principal. Consult your financial professional before making any investment decision. Stock investing involves risk including loss of principal. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Please note direct investment in any index is not possible.
Links are being provided for information purposes only. RJFS, SPC and S&M are not affiliated with and do not endorse, authorize or sponsor any of the listed websites or their respective sponsors, and they are not responsible for the content of any website, or the collection or use of information regarding any website's users and/or members.
RJ Approval # C18-007868