Recent market action: Normal market activity in the context of a bull market or, something more to worry about?

During the last market correction, the market shed over 10% in value and made a low on February 9th. There were a couple of recovery attempts and then a successful test of the lows was made in early April. Since then, the market has made a series of higher highs and higher lows and the S&P 500 finally made a new high again in August.

Over the last few days, there has been some weakness that culminated in today’s big sell off. The last time the market had this much of a sell off in a single day was eight months ago. Reading between the lines, if the last time we saw this type of one day carnage was eight months ago, isn’t it is interesting that we just came off a new market high inside of the past three weeks? In other words, this too shall pass.

Let’s put it into perspective.

The underlying fundamentals are sound and, the fundamentals always win. For example:

• Corporate earnings growth should exceed 20% this quarter for the third quarter in a row.
• Gross Domestic Product (GDP) shows the economy is finally growing north of 3% a year and should be sustainable.
• We have the lowest unemployment since 1969. That is right, 50 years.
• Consumer confidence readings have reached a record high.
• There is an extremely low probability of a recession on the horizon.
• There is positive earnings growth and valuations are not excessive.
• Interest rates are expected rise some but for good reason. The economy is doing well.

Corrections are a normal process in a bull market. Though it can be scary, it is usually healthy to get some profit taking and to retrench a bit to better sustain the next move up. The key is not to let human emotions get in the way. Studies show that human reaction, to bad or good news, is to overreact. This emotional reaction causes illogical investment decisions which, looking back, nearly always prove to be just that, emotional decisions.

We believe the fear of higher interest rates is overdone. The market and economy can handle higher interest rates for now. Inflation remains tame and unless interest rates and inflation rise to a point where economic activity is restrained, the market will do fine.

We believe this bull market is intact and any pause here should be thought of as an opportunity, not a time for general concern. Expect corporate earnings to be good and seasonable tendencies for the market become more favorable from now to year end. The market may go lower first, but we remain intermediate and longer term bullish. We continue to expect that patience will be rewarded.

It has been said that bull markets do not die of old age. As long as the underlying fundamentals are strong, the market will go higher over time. The baseball playoffs are here. Which inning is this bull market in? Worst case, the seventh inning stretch, but we believe this bull market is far from the ninth inning. Stay tuned.