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The Markets This Week

October 16, 2018 | Weekly Commentary

A Word on Market Volatility

by Connor Darrell, Head of Investments
It was a difficult few days on Wall Street, and many investors have begun to wonder whether it is time to worry. Volatility has a way of surfacing just when investors are starting to feel comfortable, and it can make sticking to long-term plans exceptionally difficult. It seems like ages ago now, but many of us were in this same position of pondering the death of the bull market as recently as February of this year. But following the market sell-off in early 2018, markets were able to find their footing and eventually (briefly) regain new highs.

The market’s ascent occurred despite a difficult backdrop of escalating trade tensions, rising interest rates, and uncertainty regarding the future of monetary policy and the balance of power in Washington. The U.S. equity market was able to brush these things aside because companies were reporting strong earnings growth, the unemployment rate was near record low levels, and U.S. economic growth was accelerating. All these things (both the favorable and the unfavorable) are still true today. As is typical during long bull runs, the action we have observed over the past few trading days suggests that markets (potentially spooked by a modest but sudden jump in bond yields that occurred last week) are simply re-evaluating the risks we delineated above and their potential impacts on the forward outlook.

Ultimately, we are of the belief that the list of factors supporting markets far outweighs the list of potential concerns at this time, and we anticipate that markets will eventually arrive at the following conclusions:

  • The U.S. economy remains healthy (this is supported by the myriad of economic data we track on a regular basis and reiterated by comments made by Fed Chairman Jerome Powell just last week).
  • Monetary policy, while certainly moving in a restrictive direction, remains accommodative relative to history.
  • Interest rates are creeping up for the right reasons (healthy economic growth).

We anticipate that this bout of volatility will play out much like the last one. 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.

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