Tag Archives: volatility

Market Shakeout

Following a virtual non-stop rally in the stock market since the beginning of 2017, we are not particularly surprised that the stock market should stop and take a breather. What many people find disconcerting about this sudden drop is it’s steepness and breadth. We have not been exposed to a decline this steep for quite a while.

Some commentators actually blame good economic news for the market drop, claiming that a robust economy has triggered renewed inflation fears, which they assert will lead the Federal Reserve to raise interest rates faster than expected.

Our view is that there is nothing fundamentally wrong with the economy, or with an increase in interest rates which has been widely anticipated. Long-time market observers have seen this movie before, it’s just been a long time since we last saw it. From what we have been reading, some large institutions are employing trading systems that trigger large sell orders at certain levels in the market, which in turn causes a cascading series of further drops.

On a fundamental level, the stock market responds to the economy, and we see no indications that anything has changed since the start of the year. Hiring is up, wages are rising, and millions of people are getting bonuses that they haven’t seen in years. Take-home pay will go up for millions more Americans beginning this month. Lower corporate tax rates should lead to higher corporate profits which should lead to higher stock prices. Still other corporations that have billions of dollars parked overseas, like Apple, are bringing a lot of that money home and are promising to invest it in the U.S. economy.

While the recent free-fall in the Dow has been spectacular, the markets have been abnormally placid for about eight years now. A healthy market sees run-ups and pull-backs, and in recent memory the pull-backs have been on the maximum order of maybe 3% total. While we certainly prefer the markets always go up, the reality of long-term market history is that to have corrections on the order of 5% – 10% in the midst of a bull market isn’t unprecedented or even that unusual. We don’t think this pull-back signals the end of the bull market run, but rather that we might be getting back to a more historical norm.

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On Greece & Recent Market Volatility

We’ve heard from a number of clients and friends recently, asking us about Greece and the recent market volatility.  Here is our succinct summation:

We feel awful for the people of Greece who have been caught up in the mess over there through no fault of their own.  (Those who should take the blame, well….)  It has to be a frustrating and frightening experience.  The drama unfolding in Greece has certainly added to recent market volatility.  However, it feels to us like – to borrow from Yogi Berra – “Deja vu all over again.”  The things going on today in Europe are similar to events that occurred there only a few years ago.  And, when you come right down to the real numbers, the real economic impact Greece has in the world, consider this: the entire size of Greece’s economy is roughly equivalent to the size of the GDP of the City of Philadelphia.  Which isn’t much larger than the City of Detroit.  The same Detroit that went bankrupt.  If Detroit’s bankruptcy didn’t bring down the U.S. economy, we doubt that whatever happens in Greece will have any meaningful long-term impact on it either.  So yes, the events in Greece are a tragedy of sorts (sorry, I couldn’t resist), but for the most part it’s a drama for U.S. households that is better suited for TV than for making changes in our long-term investment outlook.

On a lighter note, we want to wish all of our readers a very Happy 4th of July!  We hope you spend it safely and in good company, good health, and good cheer!

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