The first week and a half of February has served as a reminder of what volatility feels like. At its lowest point last Monday, the Dow Jones Industrial Average was down nearly 1,600 points, or about 6%. When events like this transpire, it is important to ask ourselves whether anything has fundamentally changed within the global economy that would warrant such a substantial repricing of assets. Our answer to that question this morning is a resounding ‘no’. We have discussed at great length in previous issues of The Weekly Commentary that we anticipate tax reform to benefit corporate earnings and for global economic growth to remain healthy. This has not changed.
So why did markets sell off so meaningfully? There is likely more than one answer to this question, and nobody can say with certainty that they have a thorough explanation. The easiest answer is that this is a natural occurrence in capital markets. Corrections like this allow market participants to consolidate and reassess what price levels best reflect the information available. In other words, corrections are healthy and often present buying opportunities for savvy investors.
We anticipate that volatility will persist in the near term, but that we are not standing at the precipice of a bear market. There remains a host of reasons to be optimistic about the economy and about corporate profits. Unemployment is at its lowest level in over a decade and consumers are confident. Our plan is to “stay the course” and believe clients will be well served to trust in their long term financial plan. As human beings, we tend to focus on the short term. This is a natural inclination rooted in the “fight or flight” instincts that our ancestors relied upon for survival. The key to successful investing is to put these instincts aside and focus on the long term.