Madness in the Markets

Oct 12, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

For as much volatility as we saw this week, you would think there would be a negative catalyst of some kind.  Nothing could be further from the truth.  What we actually saw this week was fear for the first time in some years.  Fear can come on quickly and is often irrational as was the case this week.  Additionally, in this day of computer trading and artificial intelligence, even the smallest ripples in the market can make significant waves.  Whether it was program trading creating a tsunami of sell orders or retail investors fearing the future, it is clear that there is an underlying unease in the markets.

Stocks were battered in two days of volatile trading amid growing concerns that rising interest rates, higher costs, and trade tensions would squeeze corporate profits.  The S&P 500 lost 5% this week which in the scheme of things isn’t as large a drop as it may feel.   For the year, the index remains up 4% (including dividends).  While this may be less than we’ve grown to expect, we should remember that the market has only been down in one of the last six years.

What made this week feel worse than it should is that the sell-off was widespread, with few areas of the market escaping unscathed.  However, the market sell-off is not a reflection of weak economic data.  U.S. economic growth, employment and wage data remain strong.  Furthermore, business and consumer confidence measures are high, and third-quarter corporate earnings are on track to post a record-setting 28% year-over-year gain.

So, what is at work here if not weak economic data?  It turns out that strong economic data, combined with the Federal Reserve’s ongoing tightening strategy, have caused U.S. interest rates to rapidly rise.  At the same time, wage growth and higher input costs suggest inflation pressures may be building, even though Thursday’s report on U.S. consumer prices came in lower than expected.  Ultimately, investors fear higher interest rates will cut into corporate profit margins.  In addition, stock investors view rising interest rates as a threat, because higher fixed-income yields may become more appealing than stock dividends.

Part of being an investor is understanding that the market can sometimes take on a life of its own regardless of the fundamental and economic data.  This week was a good example of this phenomenon.  With proper diversification, we can minimize volatility and downside risk, while allowing for the market to come to its senses.  As long as we don’t try to time the ups and downs of the market, in the long-run, we will come out ahead.  History teaches us that the key is to stay the course even when our emotions are telling us otherwise.  In fact, sometimes these events present the best buying opportunities for those courageous enough go against the tide.

In closing let’s talk about something a bit less serious.  When you think of the largest employers in the United States which ones come to mind?  For me it is General Motors, UPS, McDonald’s, and maybe General Electric.  Well it turns out the times have changed.  While I somehow forgot Walmart, which is the largest U.S. private employer with 2.3 million employees, it seems Amazon is the second largest with 541,000 employees!  Rounding out the top five are Kroger (443,000), Yum! Brands (420,000), and The Home Depot (406,000).  Would you guess that IBM comes in sixth with 380,000?  It seems the service and retail industries really have replaced manufacturing in this country.  Now you know.

October 12, 2018

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