Thoughts on the Stock Market
Imagine if we met on January 1st of this year and I said that the U.S. stock market would be up double digits in August. You would probably be thrilled with the prospect. So here we are in the middle of August with double-digit stock market gains and yet many people feel less than upbeat about the situation. The recent large swings in the market have diminished our enthusiasm.
As you know, investing consists of multiple risk factors. One of them is political risk, whereby government decisions or external events impact the market. By all accounts, we're experiencing the effects of political risk with the growing trade tensions between the U.S. and China. The Wall Street Journal said as much in an editorial today. But the paper notes that this circumstance is not intractable:
"Wednesday’s market moves are an omen of the future, not destiny. The key to avoiding the worst is to restore a sense of policy calm and confidence. Stop the trade threats by tweet. Call a tariff truce with China, Europe and the rest of the world while negotiations resume with a goal of reaching a deal by the meeting of Pacific nations in November."
We don't know when policies will shift. Some calming news on the trade wars just a few days ago caused the market to rise dramatically. Negative news a few days later caused the market to shift course.
These are all short-term gyrations. Long-term investors attempt to look beyond them. The business cycle is not dead and recessions will inevitably occur from time-to-time. No one really knows when the next one will arise after the extended, slow-growth recovery we've been experiencing.
Arguments can be made on both sides. On the one hand, the uncertainty and declining confidence that the trade tensions engender clearly dampen the outlook. Caution about the future can inhibit business and consumer spending. The fading impact of the tax cuts and less than favorable demographic trends do not help either.
On the other hand, the economy continues to ramble on, growing slowly. Companies are reporting decent earnings. Inflation and interest rates are low. Oil prices are muted. The political problems can be resolved.
You may, however, avoid the difficulties of predicting the timing of the next recession by employing a balanced, diversified portfolio that meets your financial goals. Maintaining a mix of growth and defensive holdings can help keep you invested for the long run. Boring, but effective.
I look forward to hearing your thoughts.
My family are big Crowded House fans. The title of one of their songs, "Don't Dream It's Over," is a good take away. I always enjoy the original version. For a unique rendition of the song, check out Miley Cyrus and Ariana Grande.