Investment markets had a bad day today. They did come back a bit into the close, but still it was ugly.
Why? And should we be worried?
First, some thoughts on why.
As you regular readers of my irregular blog know, I tend to comment more at times of market turmoil than I do when all is going seemingly well. Having come through the historically worst month of the market’s year – September – relatively unscathed this year, October is not starting out so well. Usually, with occasional, noteworthy exceptions, October is a better month for investors. And the six months that follow – November through April – are, historically, the better half of the year by far. So what’s up this year?
Don’t know. But I doubt it’s much. I suspect it is a reaction to higher interest rates because the economy is doing so well. (You might want to read that last sentence again.) Yes, markets can have hissy-fits over economic news that is too good. Why? Because the Fed will keep raising interest rates and also become more attentive to inflation.
Yet, this is all part of a healthy, growing economy. And be assured, we are not yet at “interest-rate neutral.” Our short-term interest rates fell to zero, remember, for many years after 2008. As our economy has convalesced, gotten out of bed, started to walk again, and now is beginning to jog, what I see is very normal.
Next week starts earnings season. It promises to be very good. It will show that the economy is starting to run now that it has two quarters of lower tax rates, less regulation, and higher consumer and investor confidence under its belt.
Please don’t lose heart or be scared out of the market. That’s why I’m writing now.
If we look back on historic market data over the last 70 years, we have had 5% drops in the stock market about three times every years, 10% drops about once a year, 15% drops about once every three years, and 20% or greater drops every six years or so. That’s the data. Trust me, it does not make sense to try to foresee and exit the market to avoid 5% or 10 % drops, if that’s what we’re in the midst of. On the other hand, if we’re facing a large drop of 20% or more – and I doubt that very much, given economic realities on the ground – there are warning signs that might help us see if a train is about to run us over.
The predictor I trust the most is The Conference Board’s Leading Economic Indicators (“LEI”) and its Coincident Economic Indicators (“CEI”), and they’re not telling us anything bad is yet on its way. (Of course, if we were about to be invaded by martians, the data would not pick that up.) Here’s the most recent LEI and CEI data, from August:
Look carefully at this August graph. Vertical grey lines are recessions. Note what happens to the LEI and CEI lines as a recession is approaching: both lines begin to fall, months or even a year or more before a recession starts. Do you see the lines declining in 2018? No, both are still rising. Will they keep rising? Of course not. But the data is not telling me that today’s, or this week’s, falling markets are likely signaling the start of something very bad or long term. And yes, I realize the LEI and CEI data cover only activity through August, 2018, now more than a month ago. But don’t miss it: a downtrend in or a peaking of economic activity had not, for sure, started by late August.
So, for now, at least, don’t lose heart. Stay invested. Trust. And have patience.
God bless you.