Uncertainty continues to impact the market. Geopolitical concerns like we are currently experiencing usually cause a negative market reaction in a shorter time frame, but historically they are always buying opportunities in hindsight. Investors need to look through market corrections and know that with patience, all will be ok given some time. The average 10%+ market correction has seen full recovery in about four months. Though times like these are no fun and test your staying power, the best decision is not to react, and do nothing.
We believe that the market will end the year much higher from here, and likely hit new highs before year end. The simple reason is that the economy is still growing and currently projected to grow above trend. Corporate earnings are strong, and valuations have come down to reasonable levels based on interest rates and corporate earnings growth rates. A “risk off” market is scary at times, but once uncertainty moves closer to the rear-view mirror, the market usually recovers more quickly than expected during the time of fear.
The Fed has indicated they will begin to raise Fed Funds rates and have indicated a first incremental hike of a quarter percent (25 basis points) this month. It is important to note that last time the Fed was in a tightening cycle, the Fed Funds rate went to about 2.25% by the end of 2016. The number of hikes predicted now would take interest rates back up to about the same level. Here is the bigger point, at the end of 2016, the Dow Jones Industrial Average ended at 19762 and is at 33300 today. Obviously, an investor that got out of the market during the last tightening cycle, would have created huge opportunity cost.
For some, it might be necessary to just ignore the market for a while to avoid decisions that likely would create regret in hindsight. The key is to be able to focus six months or more into the future and know that market corrections are a normal process. Fundamentals always win given some time. Emotional “risk off” market periods come and go, but always reverse once uncertainties fade and common-sense returns. Here is a chart that shows intra-year pullbacks versus year end returns.
We encourage our clients to be patient. Over my 40 years in this industry, I have been though many periods like this before. The stock market is the value of publicly traded corporate America and investors should not bet against it. Warren Buffet once said, “Our favorite holding period is forever”, and “Be fearful when others are greedy, and greedy when others are fearful”. This is likely another time when greed, or at least patience, will be rewarded given some time. The market will be like the weather, winter is cold, but spring is not far away.