Last week the market had the worst week of the year and today is the worst day of the year, as of this writing. We were at an all-time high just 10 days ago. We have said before that we would likely see more volatility this year, but it is important to put it into perspective. Volatility is not risk, it is opportunity. Equities have always provided better returns compared to bonds and other asset classes over time. The key is to avoid making emotional decisions during short term market corrections.
Keep in mind that after the significant weakness in December 2018, the S&P 500 made a new all-time high on May 1st this year. After about an 8% pullback in May, the S&P 500 hit another all-time high on July 26th. Patience was rewarded then, and we believe will be rewarded again.
The two primary drivers of the market for a while have been the Fed and China trade. On July 31st, the Fed lowered interest rates by .25%. At the time, there was about a 20% expectation that the reduction in interest rates would be .50%. The decision to only lower by .25% caused a minor market reaction. Then, almost immediately after the Fed interest rate decision, new China tariffs were announced beginning September 1st. The 10% tariffs would have little impact on the U.S. economic output, but raised the level of uncertainty as to when and if a trade deal with China would happen.
Meanwhile, the U.S. economy and corporate earnings are still growing, and we do not have the excess valuations that could be the precursor for the end of the economic expansion. In the short term, the market always overreacts up or down. We do not see the recent weakness as a change in overall trend. Relax and know that a full recovery from the typical market correction is not far off. We remain bullish intermediate to longer term.