As we noted in our February newsletter, our old friend volatility has returned to the stock market. Look no further than our first chart to see the ups & downs of the first quarter… A run up to start the year, a sharp decline into negative territory in February only to see a slight rebound by month end, then a retreat in March to end the first quarter in negative territory (S&P 500 Index down 1.2% as of March 31, 2018). Let’s just say the tune has changed on Wall Street.
To get a better sense of the level of volatility, we’ve included a second chart showing the stock market price movement for the first quarter of 2017. Quite a different story. You would be hard pressed to find any extended period in 2017 that shows the action we saw in this year’s first three months. Love it or hate it, welcome to the stock market!
The question on everyone’s mind is “What is causing all this stock market volatility and driving it down?” One word: Uncertainty! If two plus decades of stock investing has not taught us anything else, it has taught us that the majority of stock market participants DO NOT like uncertainty! Believe it or not there are “investors” who do not take a long-term view of stocks. Therefore, short-term volatility makes them nervous. In our eyes, this is not investing, it’s speculating. But, I digress.
So, what uncertainty has been unearthed over the past three months that has shaken confidence in the great bull market? The topics du jour: 1) A potential trade war, 2) Increased regulation on tech companies (The Facebook hearing spurred this), or 3) The Federal Reserve and their ability to navigate the relationship of inflation and interest rates… or more to the point, is the Fed going to put a halt to our “cruise control” economy by raising rates too fast and too high?
If we had to choose, our biggest concern would be door number three. Tightening of interest rates will impact all things economic, which to the right level and at the right pace will ultimately be good for extending our bull market. But, if the Fed misreads the economy, they can potentially put an end to the good times. We’ll continue to watch these folks, but we definitely welcome some volatility as all it does for us long-term investors is create buying opportunities. We can’t ask for more than that, especially in a strong economy.