I wanted to reach out to address the recent stock market volatility. For the past few months, it seems as if every news headline has been negative and while there are certainly causes for concern, there are some reasons for optimism. Before touching on this, I wanted to reiterate some of my comments from our last letter and discuss our approach to portfolio construction.
We’re about to enter that exciting time of year when all sorts of market predictions are made by people who are mostly claiming that they knew the future and have accurately predicted it over a great track record. If you’re smart, you’ll turn off the TV or move on to the next article.
Very quietly, the United States economy crossed a remarkable milestone. As of October, America is now energy-independent for the first time. For comparison purposes, the U.S. was spending a whopping 4% of its total gross domestic product to buy foreign oil and gas as recently as 2008.
You may have read that there has been a drop in new home sales—down 13% in September compared to the previous September—and that, combined with the drop in stock market values, might have you worried about the state of the U.S. economy.
I wanted to take a minute to address the most recent bout of volatility in the market. Before addressing the causes for the recent downturn and providing our thoughts, it’s important to remind investors of the benefits of having a diversified portfolio. Different areas of the market will outperform at different times and it can be tempting to wonder, why bother holding asset classes that are not performing as well as others at any given time? The reason is that changes in the market happen quickly, much more quickly than changes in the economy and much more often. In fact, since 1980 the average annual intra-year drop for the S&P 500 is 13.8%, yet the Index has rebounded to finish the year positive in 29 of the 38 years analyzed and averaged an annual gain of 8.8%.
Today’s relatively sharp market sell-off is generating a lot of discussion around the impact of rising interest rates on financial markets. Although there are legitimate concerns that the Federal Reserve’s interest rate increases could reduce demand for relatively riskier asset classes like stocks and slow the economy more than expected, it is our view that these concerns are outweighed by other, more positive factors. Our outlook is rooted in the continuing underlying corporate and economic strength domestically, as well as a longer-term contextual view of why interest rates are rising in the first place.
If you’ve been paying attention to the financial news lately, you’re probably seeing a lot of ominous predictions—and they’re usually backed up by some ominous headline. The most simplistic are saying that the bull market has now lasted ten years, so therefore it’s about to come to an end—as if bull markets come with a time limit. Others, equally simplistic, are saying that the market has reached a new high, and, well, don’t markets fall from their all-time highs? This ignores the fact that more than 70% of the time, a new high is followed by another new high—and ultimately, so far in history, every new high has eventually been surpassed by the next one.
Front and center in the news lately is the concern over Turkey’s currency crisis, with the country’s lira falling against the dollar by as much as 20% in one day. Last week’s downfall was led in part by President Trump’s doubling of tariffs on imported Turkish steel and aluminum along with continued heated rhetoric over an American pastor being held in the country. Couple this with Turkey’s authoritarian president, Recep Tayyip Erdogan, and his brash tone toward international and domestic policies, and you can see the idiosyncratic factors that sent the lira tumbling.
You’ve no doubt read that we are experiencing the second-longest bull market since World War II, which started in March of 2009 and has continued without a bear market (defined as a decline of 20%) since. But is that true?
Last week, there was finally some evidence that the investment markets were starting to get jittery about the escalating tit-for-tat tariffs and threats of tariffs that some economists are calling “America vs. the World.” Most investors are probably wondering whether new taxes on items flowing into and out of the U.S. really is something to worry about.