Over the last two days, the market finally reminded us that yes, it can go down. Is this the beginning of a more substantial correction or, as in recent times, will the dip be bought and, is there still an underlying bid supporting prices? When you put it in perspective, we had 14 new record highs for the S&P 500 since the calendar turned to a new year. That is the most since 1955. Stocks have had the longest run in history without even as much as a 3% pullback. A pause at some point was expected. Corrections are natural and, even healthy, in order to sustain a longer term secular bull market.
Since the party started in 2009, it is worth remembering that we have had 12 corrections of 5-10% and 4 draw downs of between 10 and 20% from a previous high. We recovered from those in a relatively short period of time. Whether the dip over the last two days is bought or, it accelerates into more normal corrective activity, we believe the underlying fundamentals are not only strong but, improving.
The market is harder to predict the shorter the time frame so, let’s focus on the big picture.
Earnings are growing and, though not cheap, valuations are not historically excessive.
Interest rates are rising but are still low on a historical basis. This is the cost of capital for companies to run, start and grow their business.
There is still a lot of liquidity to fuel the market. Though skepticism has abated to some degree, there is still enough to propel the market higher over time. And, we have yet to see a retreat from bonds as interest rate risk becomes more pronounced. Some of this money will find its way to the equity market.
On top of already solid fundamentals, tax reform will add significantly to corporate earnings and create additional consumer spending. Not to mention the amount of capital that will be repatriated by multi-national companies. Domestic and international economies were already showing solid improvement even prior to tax reform.
So enjoy your favorite pastime and try not to focus on the market day to day. Market corrections are a normal process in the context of a bull market and recovery times are historically fairly short. Stay focused on the big picture and if market stress is on the horizon near term, we believe you will be rewarded for your patience.
Royal Fund Management, LLC
