I’ve had a number of people ask, what’s causing the market volatility? The economy is good! Why would the market be going lower if the economy is good?
Unemployment is low, consumer sentiment is still good, corporate earnings are still great, so what gives?
For new investors, it’s important to always remember that the stock market is a forward looking vehicle. A company might have just reported record profits, but if the market believes that the future is murky, the stock is going to tank. What you did yesterday really doesn’t matter.
As such, many analysts expecting a slowing economy looking ahead. This doesn’t necessarily mean recession, but it’s about rate of change. If the economy is slowing as a result of a variety of factors (more on those in a minute), then stocks are going to go lower.
Moreover, it’s worth noting that we’ve had a historic bull market in terms of both duration and lack of volatility. A 7% move off the highs only feels dramatic because we’ve been lulled to sleep by the lack of volatility going back almost a decade.
Fed rate hikes have a knack for ending the party and we’ve had a bunch in the last couple years. The September 2018 rate hike was the 8th time the Fed hiked interest rates going back to the first hike in December 2015. As the Fed attempts to normalize interest rates from historic lows since the 2008 crisis, it’s not ideal for stocks.
One thing I’m watching in the months ahead: Technology stocks have led this market for a while. Gains in 2017 and 2018 from the large cap tech stocks such as Apple, Amazon, Google, Facebook, Microsoft and Netflix drove the overall market higher. In fact, most people don’t realize that much of their index gains came from these stocks as well (See: Just three stocks responsible for most of the market’s gains this year).
Tech stocks also peaked earlier than the S&P. Tech stocks rolled further over before the S&P did. For instance, many of the large cap stocks had their 50 day moving averages cross below the 200 day moving averages in the last month. The S&P is close to doing this as well. So, the large cap tech names have been leading the market lower.
This dynamic is interesting for a couple reasons. First, some great companies are on major sale right – Netflix continues to be my favorite. Second, should tech rebound, you can probably expect the S&P to follow at least until this current dynamic changes.
So, what about 2019? Most would bet that it won’t be a great year for the broad stock market. But most are also typically a prisoner of the moment, and the sentiment right now is bad. If the economy doesn’t go into a recession, then it could represent a great time to move some cash into valuable names that have been beaten down. If a recession risk increases, then your first goal needs to be to make sure you have enough cash to get through any unemployment risk. If unemployment or income disruption isn’t an issue, then we might have a fantastic buying opportunity coming soon.
Stocks really aren’t down that much yet, though (S&P 500 -10.1% off its all-time highs, Dow -9.0% and the Nasdaq -14.1%). So, I say be patient. Stick to your strategy, and if you’re like me and have been hoarding some cash waiting for good opportunities, don’t fire until you see the whites of their eyes.