The first 10 days in October have been as turbulent as the recent weather we have had here in North Carolina. Despite an overall backdrop of pleasant and mild economic conditions, we have seen gusts of pessimism hit Wall Street in the last few trading days.
Given that the media is now flashing headlines such as "WORST DECLINE SINCE JANUARY" and "LONGEST LOSING STREAK IN 2 YEARS", we thought it would be a good idea to remind our followers that what's occurring is a normal market adjustment. Despite the hype oriented headlines that the media presents, the real story seems to be that stock prices shot up in the last few days of Q3, and probably got a little ahead of themselves.
During the last 2 weeks of September, investors' attention was on the news that Canada, Mexico, and the U.S. reached a new trade arrangement that was good for all nations. That news gave investors an emotional high in the face of more difficult ongoing trade discussions with China. When large quantities of investors get excited about the possibility of future improvements to our economy, they tend to bid up stock prices in the short run. However, stock prices should reflect the earnings and future earnings growth of corporations.
This week, we observed that the US producer price index rose for the first time in 3 months, signaling that the Fed would continue to tighten interest rate policy sooner rather than later. With the implied assumption that rates will continue to rise soon, investors are now taking money out of stocks as they are concerned (this week) that higher interest rates will cause lower earnings and headwinds for corporate growth.
We have not written about market volatility in a while, but it's important for us to keep our eye on the goal of building wealth for the long run. If you can stay focused on investing in diverse portfolios, with quality investments, your specific time horizon, and having the comfort that most of your stocks are hedged in our portfolios (to limit large losses), then most of what you see on the headlines is noise.
Bottom line: It is very normal to have market price swings of +/-10% in almost every calendar year. It's also important to stay focused on your long term goals when we have short periods of volatility. The economic landscape in the U.S. is very good at this time. There are many reasons to believe that the coming years will continue to produce corporate earnings that are worth the periodic volatility.