Yesterday the market sold off based on continued uncertainty about trade tariffs and whether U.S. tariffs would be met with similar trading partner decisions which could potentially escalate a “trade war.” The initial steel and aluminum tariffs were absorbed by the market but the realization that additional tariffs, particularly related to China, renewed the uncertainty.
Uncertainty versus fundamentals: The market does not like uncertainty and there is a lot of head wind right now. Over time however, fundamental always win. Underlying market fundamentals remain good and in fact are improving. Corporate earnings are expected to grow in 2018 even more than last year and corporate cash flow is strong. Signs are that economic growth is simultaneously accelerating domestically and worldwide. Even today, the announcement for durable goods orders for February came in at nearly at twice the level expected.
Volatility is back this year after a long period of market complacency. However, put in context, the S&P500 in only slightly down year to date. Tax reform was a boost to the market as it is expected to add 8% or more to corporate earnings. Now trade tariff concerns have taken center stage. The shorter the time frame the harder it is to predict but, we remain intermediate to longer term bullish and expect the market to be up for the year.
We believe continued patience will be rewarded and encourage our clients to avoid emotional decisions. Market corrections are a normal process in a bull market. The economic fundamentals and indicators still point to better times ahead.