While some view market volatility as a regrettable aspect of investing, it is a welcome phenomenon for active portfolio managers. The key word here is “phenomenon”, that is, a situation that has been observed and whose cause is in question. In other words a reaction in search of a cause.
That is where we find ourselves today. Markets are down 15.5% since October 3rd, yet economic data remains supportive of a growing economy with Leading Economic indicators outpacing estimates this morning with a 4.4% increase since May. Additionally, earnings growth for U.S. companies during the quarter was over 8%. When markets fail to follow the data, investors become uncertain of the causes of those market reactions.
Enter FEAR and GREED. Bear market proponents have warned the recent yield curve inversion is a precursor to an imminent recession. Continued tightening by the Fed yesterday, increasing the Fed Funds rate to 2.5%, has further stoked the FEAR trade. While others have looked to trade wars as the cause for a potential slowdown and recently cited the increase in volatility as evidence that an end is near.
First, we have never had an economic recession without a marked increase in inflation. Yesterday, the Fed commented that inflation remains low at 2% with little change in expectations going forward. Next, we should recall that through 2017, volatility remained near record lows and provided no insight to the correction in January of 2018. In fact, the only predictive power of volatility is that it is best to invest (though more difficult) when volatility is high.
Benjamin Graham, the father of value investing, personified these market reactions by using an allegory with Mr. Market as an investor. Graham wrote that most prices that Mr. Market quotes are reasonable. Yet, when Mr. Market is overcome by boundless optimism or bottomless pessimism, he will quote you a price that Graham noted, “seems to you a little short of silly.”
In consideration of recent market movements, we will be ensuring equity allocations are consistent with targeted objectives; as at this time we find this bottomless pessimism “short of silly.”
As we close out the year of 2018, we would like to thank you for your trust through the year and wish you
Please contact a member of the Wealth Management Department if you have any questions about this information.
Rich Gartelmann CFP® – (630) 844-5730 firstname.lastname@example.org
Steve Meves, CFA® – (630) 801-2217 – email@example.com
Brad Johnson CFA®, CFP® – (630) 906-5545 firstname.lastname@example.org
Jacqueline Runnberg CFP® – (630) 966-2462 email@example.com
Ed Gorenz – (630) 906-5467 firstname.lastname@example.org
Mike Demski – (630) 966-2430 email@example.com
Mike Cava – (630) 281-4522 firstname.lastname@example.org
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