Today’s modern financial markets move quickly. If you blink you could miss significant price changes. Corrections and rebounds that used to take months or years now seem to occur in weeks or even days. Last year ended poorly for stocks, punctuated by an intense sell-off just before year-end. Christmas Eve was the worst in history for US stock markets, and prices slid from there into the New Year. The whole fourth quarter was lousy, and the Fed’s interest rate hike in December added an exclamation point.
However, in the new normal of compressed time horizons, rebounds can happen quickly also. Once the calendar turned, Fed Chairman Powell turned abruptly himself – saying very plainly that the Fed is now likely on hold for all of 2019. With that, stocks also bottomed and turned higher. In the first three months, the S&P 500, Dow, and NASDAQ indexes gained 14.3 percent, 11.8 percent, and 16.5 percent, respectively. As of the writing of this Recap, the S&P was up 16 percent year-to-date and has regained its all-time high from October.
No matter the reason(s) for the round trip from all-time-highs to the lows in late December and back, this short period of exceptional volatility provides yet another powerful argument against market timing. Markets climb “walls of worry” when potentially negative uncertainties (e.g. Fed action or inaction, global trade rhetoric, plateauing US growth and a slowing Chinese economy, etc.) are resolved. Not everything has been decided, but it now appears the Fed is on hold, and that the US economy is seemingly stronger that was briefly feared. We believed the sharp correction in the fourth quarter served to consolidate recent gains and was not necessarily the start of a prolonged bear market. A few short months later, we appear to have been right. There will be more corrections and eventually a true bear market, but it likely won’t pay to panic when they arrive.
Having a process and maintaining discipline during volatile markets is how Peloton avoids the costly mistakes that result from emotional decision-making. During downturns of any magnitude, it is important to recognize that we are investing in a market of individual stocks, not a monolithic stock market with a mind of its own. We view the general trend in the broad market as a headwind or tailwind for the prices of individual stocks, which are driven by the fundamentals of real underlying companies and their operating results – profits and cash flow. Very strong headwinds (sharp downturns) can be difficult for even the best-performing companies’ stocks, but eventually, solid results are reflected by higher stock prices.
Now that many stocks have fully rebounded, what’s ahead for the balance of the year? Much of that depends on developments in ongoing multilateral trade negotiations as well as the persistence of relatively strong economic data in the US. The Fed could theoretically pivot again and create a soft patch for stocks, but that is only likely to happen if the data are so strong that the Fed has no choice but to hike rates. Historically, when a sharply negative quarter is followed by a very strong quarter, stocks continue to advance in the months ahead. Keep in mind, though, that neither today’s markets nor our current administration seem particularly interested in following historical patterns.