Clarks Green Office

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Clarks Green, PA 18411
The Headline Risk Is Back

The Headline Risk Is Back

March 24, 2018
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Earlier this year on February 6th, I remarked about the two day, 1,000 + point swoons hitting the markets and suggested that the volatility is likely to continue for weeks to come.   I also mentioned that headline risk is likely to continue on, causing future shocks to the markets.  Over the last two days, we saw that volatility hitting hard once again with the Dow Jones industrial Average plummeting another 1,000+ points in the last two trading days alone. 

So, what are the catalysts this time around?  In my  opinion, this is a “test” where the market is going to revert back to the lows we saw in February and, in my opinion, although it’s not very enjoyable, it’s healthy for the market to act this way.  A “V-Shape” recovery that takes markets quickly back to all-time highs could lead to an even bigger bust in stocks…So, simply from a technical standpoint, the market is “backing and filling” and has to work its way out of the near-term bottom in a “saw-tooth” type of movement and not a “V”.   

Low trading volume and a lack of buyers in the market added fuel to the fire last week and, at the moment, the positive outlook for the economy, company earnings, employment, and the current valuations of stocks are all being ignored.  The selling this time around is being sparked by headlines of trade wars and Facebook data breaches.  

Some analysts believe that the Trump Tariffs are  merely scare tactics being used to begin fair trade negotiations and eventually, cooler heads from the Trump administration will prevail, avoiding an all-out trade war.  Additionally, we live in an economic world of trillions of dollars and the tariffs that were recently announced would be levied on $50-$60 billion.  That would mean that the nominal dollar impact would range between $5 to $6 billion…Compared to the size of the world economy, any impact would be rather negligible on a relative basis (my opinion). 


As for the Facebook breaches, the company will surely take steps to prevent any future problems, and most likely, just as in the Equifax data breach, Facebook executives will find themselves in D.C. being grilled  by lawmakers.  But eventually, the focus will most likely be on the company’s growth and bottom-line earnings which is most important when considering a company like Facebook as an investment.    

In my last message, I reminded clients to expect more gyrations and volatility and that the “all clear” signal is most likely not here yet.  It’s the world we live in now as investors and it’s important to remember that  owning very great companies in our portfolios doesn’t necessarily mean that those great companies will always be “great” stocks in the market.  Systematic risk (which is non-diversifiable) does not discriminate and that means when the ov erall market is tipping over, all stocks take a hit.  But when the fundamentals are back in the spotlight, I believe that a well-diversified portfolio will be the place to be for future growth. 

The market has risen 322% since March 2009 and 17.8% in the past 12 months – these types of gains need to be digested in order to avoid the potential “boom to bust” that we’ve seen in the past.  So, in the end, markets go up and they go down.  Market volatility was non-existent for so long, and historically, long periods of low volatility can lead to long periods of increased volatility.   In the long run, however, I believe that fundamentals drive earnings and earnings drive markets.  And as long as the trajectory of the fundamentals stay on their current course, calmer waters are ahead.  

As always, please contact me with any questions or concerns regarding your investments and/or overall financial plan.  Keep an eye out for future updates!! 

Disclosure: (The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.)