Written 420 years ago, this comedy by Shakespeare includes plenty of farce and drama of the shallowest kind, after which “all’s well that ends well.” It even includes “fake news,” with one character being convinced of the supposed infidelity of his beloved in order to ruin a wedding, while others are manipulated into overhearing staged conversations confessing the undying love of their paramour for them. Sounds a lot like this past quarter.
Last year, we saw unprecedented low volatility, with a seemingly sleepy and happy market inching up a little almost every day. Equities around the world joined hands in happy lockstep growth — no drama, no setbacks, fear and greed apparently on vacation. This continued through January, before someone somewhere decided enough of this quiet euphoria — time to put the unpleasant surprise back in the punchbowl!
Starting in early February, we suddenly experienced the return of volatility. We saw lots of equity market indices gaining or losing more than 2% in a day, something that did not happen at all in 2017. As we saw in the “Return of Frankenstein,” the monster was not dead after all, and here he is! But what brought this poor, misshapen beast back from the dead to harass us once again? And why do his attacks seem, ultimately, so ineffectual? After all the excitement in Q1, the equity markets were down very little. It seems much ado about nothing.
Where to begin? The laundry list of issues is endless. Why bother listing them? From Fed policy to trade wars, from Stormy Daniels to potential war in the Middle East triggered by horrific events in Syria — if you are looking for what could go wrong, you do not have to look far. From the trivial to the existential, our menu of issues seems endless.
Are we suddenly in a period of greater danger? Have things gone badly wrong, with disaster looming in the near future? Or are issues that received scant attention for a long time suddenly becoming objects of attention?
Executive summary: It seems obvious that the serious issues we face are not new. And a lot is going well — the global economy is growing faster, and profits are very strong. Unfortunately, it is also clear that we need to search hard for the facts these days; do you remember a time where you had to screen out more of what passes for news to try to find the facts?
It is easy to say that we always experience troubles and problems, and the markets are always unpredictable, and we know that a disciplined approach to long-term investing works well. But your confidence can be shaken by a steady barrage of hysterical “the sky is falling” talk — we would say “news,” but a lot of it isn’t. You may or may not like many things that are happening in the country and the world, but it is important for long-term investors to remind themselves that bad news “sells newspapers.” We all need to beware allowing too much of that stuff to worry us to the point where we might make bad decisions.
So what am I to make of all this? Got a few bullet points for us?
Sure, a couple of big-picture facts might be helpful to keep in mind:
1. The latest forward-looking price/earnings numbers for the S&P 500 declined to 16.4, close to long-term averages — not because equities declined but because earnings growth continues to be very strong. Equities do not appear to be “overvalued” just because the index numbers are near record highs.
2. A lot of the headlines seem to reflect the worst conceivable outcomes as we confront serious longstanding problems, from tax reform to terrorism and wars in the Middle East.
— It is almost like shouting that you might be killed in a horrible accident every time you get into your car. It is possible, but unlikely.
— We can observe that few of the dire predictions have materialized; the outcomes have been more reasonable than “expected” so far.
— Obviously, there are no guarantees and the dangers are real, including some we don’t know about yet. But that will always be true.
3. There are few signs of inflation so bond rates are not climbing rapidly, even as the Fed raises short-term rates. No reason to panic about bonds.
4. Unemployment is low to moderate, depending on how you measure it, but job creation is proceeding at a good pace. We are also starting to see wages increase, but none of that appears to threaten us with inflation anytime soon.
So let’s adjust to some increased volatility in the markets and in the media and not get rattled. Our plans and good discipline are here to carry us through, as we focus on the things we can control and try to let go of the rest. Have a wonderful spring, everyone!