A couple weeks removed from the ugly market opening on Monday August 24th, a little time for reflection. First, as previously mentioned, we had not seen a full 10% correction in about five years. Even in the context of a bull market, corrections have historically come about every eighteen months. In other words, maybe we were due. Corrections are painful and can make you question your resolve but, emotional decisions are wrong in hind sight nearly 100% of the time.
The gap opening of -8.34% in prices on the 24th was the worst ever for the NASDAQ 100 index. To put it in perspective, it was worse than those during the financial crisis in 2008 and even exceeded those that occurred right after September 11, 2001. Our opinion is that it was the worse market opening we have witnessed since Black Monday in October 1987. As unnerving as that may seem, that is why we have to stay focused on the fundamentals.
The U.S. economy is growing and picking up some momentum. This is the only reason the Fed is considering raising interest rates. Rising interest rates does not mean the bull market is over, in fact, quite to the contrary. Of the last eight Fed tightening cycles since the 1950s, the market has gone higher for an average of two and a half years after the first hike. One year later the market was up an average of 9.5%. The Fed is considering raising rates in the context of data like record automobile sales and the economy now driving 200,000 new jobs a month on average. As with many other indicators, this is positive data.
Bear markets do not start because of higher interest rates. Bear markets begin in anticipation of a recession. The fact is the economy is improving not contracting and a recession is not in view even on the distant horizon.
Due to uncertainty, we expect volatility to continue this month prior to and immediately following the Fed meeting on September 16-17. However, we remain confident that this bull market is still in the middle innings and patience will be rewarded handsomely. When the dust settles, we expect the market will be higher by year end.