Current Commentary

Last week’s market slide has been a long time coming. It’s been a couple years since we’ve seen a correction within what is now this 9-year-old bull market. We’ve been getting concerned about the unabated strong run-up lately. Markets periodically need to pause and digest gains in order to stay healthy and keep overall risk for the trend at reasonable levels. Last week, the Dow Jones Industrial Average shed 4.1%, with a one-day 666-point drop coming on Friday. Other indexes were off a little less. While large numerical movements like this can seem concerning, the percentages are what needs to be focused on, and that translates to 2.5%. Long-time investors may recall the market crash of October 1987, when the DJIA fell 508 points. But back then, that represented over 22%! The point is, with an index around 26,000, it takes large point movements to make impacts of some percentage.

Our concern has been complacency. Many have gotten so used to weekly gains that they’ve forgotten about normal levels of volatility. In fact, the last time the technical indicators were listed as remotely cautionary was last August. The catalyst for Friday’s action was ironic: too strong economic data. Year-over-year wage growth was up a healthy 2.9%. Wage growth was one of the many missing components to the lackluster “recovery” from 2009-16. But the concern among market watchers is that this could lead to inflation, which in turn would spur the Fed to raise overnight fund interest rates even faster than they plan to. That drove up the 10-year Treasury yield to 2.852%, creating a bond market selloff. This may or may not be overblown. While Keynesian theory holds that higher earnings are inflationary, that notion discounts productivity gains and myriad other factors and there is scant data supporting this conclusion. But, that fear has some warrant to it since our policy makers buy into this theory, and therefore have a history of acting on it.

However, it bears keeping in mind the big picture. Last week’s collective decline is in the 4% range from peak – not at all worrisome and as we mention above, overdue and in our view welcome. In fact, we’d like to see this pull back at least 5% or more to shake out some fear and build caution. Today, the losses are less, but helping to get there. Also, recent economic data show the nation’s growth rate in the 3% range, which is double the rate over the aforementioned “recovery” period. Globally, the world’s major economies are in sync, which is unusual but positive. Additionally, unemployment is at low levels and most important in this area is labor force participation, which has been climbing out of the doldrums. Recent actions slashing wasteful and burdensome regulations and the brand-new stimulus affects of the just-passed tax reform package are already evident and will keep things moving along nicely. Stock prices are driven by corporate earnings, interest rates, and inflation. The Fed has been concerned of late that inflation has long been stuck well below its target level of 2% (deflation is a major problem, so some level of inflation is necessary). Maybe now, that target will be achieved. Interest rates are rising, but not to dangerous levels and are still quite accommodative for financing growth. And, corporate earnings are being reported as quite strong and will likely strengthen further with more people working and getting paid more, thereby investing and buying goods and services with those proceeds, creating demand.

In short, while we’re always on alert for significant market declines that may warrant protective strategies, the smart money holds steady in most declines since they are usually short-lived and shallow and knowing the start and end of them in advance is impossible. Missing the rebound is more likely to hurt long-term performance than help. So, we welcome this pullback, but will keep an eye on it to make sure we weather it successfully.

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