The U.S. stock market has not had a 10% correction in nearly 26 months, then on Feb. 8, 2018, the market hit a 10% decline from its most recent high on Jan. 26, 2018. Normally, we have this type of moderate correction once a year, and a 15% correction in the stock market every two years, on average. A bear market is defined as a 20% correction of the stock market, and statistically, that happens once every three years.
The reality is, we haven’t had a 20% correction since 2008. We are in one of the longest bull market runs at 108 months of upward movement. The worst performance we saw in 2017 was a short-term loss of 2.8% over a two-week period. Historically, 2% daily declines in the stock market are relatively common.
This dip should not be a cause for panic. A stock market decline isn’t necessarily a bad thing. As an investor, you should look at what is causing the volatility. If you cannot determine what is causing it, your answer could be that you do not want to do anything different to your portfolio or investment strategy.
Volatility picked up again in early March with President Trump’s announcement that he would place tariffs on steel and aluminum imports from China. Recently, China responded aggressively with tariffs on soybeans. However, we believe that China relies on the United States more than the United States relies on them. If we were to stop buying steel or aluminum from China, that wouldn’t likely have a significant impact on the Chinese economy. However, if China ceased to buy soybeans from the United States—our No. 1 agricultural export to China—China may feel the pain. The president’s advisers have maintained that Trump supports “free trade,” and it is possible that these tariffs are a negotiating tactic. That leaves us in a “wait and see” position.
Speaking of the president’s advisers, is the current administration’s upheaval cause for worry? In his 15 months in office, President Trump had unprecedented staff turnover with six fired, 12 forced out, and 10 resignations, according to the New York Times. However, there is generally no direct correlation on how the market will respond to an elected administration. If you are following an investment philosophy such as the Ten Year Rule, who the president is shouldn’t matter. Your financial plan is based on your needs and situation—not whether the market is going up or down or if a Democrat or Republican is in office.
Furthermore, some of the basic economic indicators we watch as analysts are supportive of growth. Expectations are still in line for 2.7% growth in gross domestic product for 2018. Unemployment is at 4.1%—the lowest it has been since 2000. Fourth quarter 2017 earnings grew more than 14%, and first quarter 2018 is poised to do the same. Both the manufacturing and services sectors are still looking strong, and oil and gas prices are not expensive.
That brings us to quantitative tightening. The Federal Reserve is working to raise short-term rates and shrink its bond portfolio. By letting bonds they hold mature and not buying new bonds, the demand the Fed created is gone. This is unchartered territory, as The Federal Reserve has never attempted a reduction like this. We believe a slow, steady reduction can occur, but the economic effect is still not expected to spur growth. We believe this may be adding to the volatility in the equity markets.
Despite the recent volatility, we believe the momentum seen in recent years could continue; however, slower price growth would allow valuations to become more justifiable.
If you have questions regarding how the market’s movements affect your Ten Year Rule strategy, the experts at Henssler Financial will be glad to help:
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- Email: experts@henssler.com
- Phone: 770-429-9166.
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