Observations on the Market Correction

There’s rarely a good reason for a stock market downturn. I’ve been studying many of the historical bear markets and corrections that don’t get as much publicity as the usual suspects (looking beyond the Great Depression, 1973-74, Black Monday crash, the dot-com bust, Great Financial Crisis, etc.). The theme I’ve found in many of the other instances where markets fell is very few have a catalyst for the downfall, even after the fact.

It always feels better to have an explanation for these things because then we can tell ourselves we’ll look for similar circumstances in the future to try and avoid a market fall. But most of the time the reason stocks fall is because they can’t simply rise forever.….

It’s always tough using a historical playbook for these things because every new market move is unique in its own way…. The biggest thing to remember is that no one has a clue what’s going to happen next. Short-term market moves are controlled by human emotions, which are impossible to predict.

— By Ben Carlson, at his blog A Wealth of Common Sense. Read Full Article

Taking Stock

Yes, stocks…[briefly] surrendered a tenth of their value [a few weeks ago]. But the reality is, our stocks and stock funds are typically a small part of our overall net worth. We might also have bonds, cash investments like savings accounts and certificates of deposit, our future Social Security benefits, any traditional pension plan we’re entitled to, our home and our income-earning ability....

If we’re employed, we have paychecks ahead of us. Those paychecks are a source of future savings, which we can think of as a chunk of cash that’s yet to be invested. Once we factor in that cash, our portfolios may be far more conservatively positioned than our current asset allocation suggests and a big market drop could be a huge plus, because it’ll allow us to invest those future savings at lower prices.

It’s hard to be so sanguine if we’re retired or close to it. When markets tumble, our emotional time horizon often shrinks, and we obsess over every rise and fall in the market averages. My advice: Add up the money you have in bonds and cash investments, and compare that sum to the income you need each year from your portfolio. In all likelihood, you could go many years without selling stocks.

— By financial writer Jonathan Clements, from his website Humble Dollar. Read Full Article

Optimistic Perspective

The key inflection point for bond yields wasn’t when the Fed announced the unwinding of QE; it was Election Day 2016, when the 10-year yield ended the day at 1.9% while assuming the status quo, which meant more years of Plow Horse growth ahead. Since then, we’ve seen a series of policy changes, including tax cuts and deregulation, which have raised expectations for economic growth and inflation. As a result, yields have moved up.

Corporate earnings are rising rapidly, too, and the S&P 500 is now trading at roughly 17.5 times 2018 expected earnings. This is not a bubble, not even close. Earnings are up because technology is booming in a more politically-friendly environment for capitalism. And while it is hard to see productivity rising in the overall macro data, it is clear that profits and margins are up because productivity is rising rapidly in the private sector....

The good news is that QE did not lift the economy. Markets, technology and innovation did. And this realization is the key to understanding why unwinding QE is not a threat to the bull market.

— By Brian S. Wesbury, Chief Economist; Robert Stein, CFA, Dep. Chief Economist; and Strider Elass, Economist, First Trust Advisors LP. Read Full Article

New Boss, Same As the Old Boss?

Jerome Powell formally took over the chairmanship of the Federal Reserve...And he is no clone of Janet Yellen, the recently retired chair, contends David Rosenberg, chief economist and strategist at Gluskin Sheff. “He is sensitive to the criticism of the Fed, that it is a serial asset-bubble blower. He is no fan of [quantitative easing] or ultralow interest rates. At his recent Senate confirmation hearing, he made it clear that it is time to normalize rates,” Rosenberg writes.

Normalizing means a 2.75% rate for federal funds, which he notes is twice the midpoint of the current 1.25% to 1.5% target range for the Fed’s key interest-rate target. “This spells something more than two or three hikes this year, something I don’t think the stock market fully appreciates, but has begun to at least contemplate in recent weeks (which is why we have begun to see this intense volatility).” Reduced liquidity more than offset strong fundamentals in 1987, 1994, 1998, and 2007, which saw steep market drops.

— By Randall W. Forsyth, writing for Barron’s, February 10, 2018. Read Full Article

Conditions Matter Most, Not Causes

“The specific manner by which prices collapsed is not the most important problem: A crash occurs because the market has entered an unstable phase, and any small disturbance or process may have triggered the instability. Think of a ruler held up vertically on your finger: This very unstable position will lead eventually to its collapse, as a result of a small (or an absence of adequate) motion of your hand or due to any tiny whiff of air. The collapse is fundamentally due to the unstable position; the instantaneous cause of the collapse is secondary.”

— Didier Sornette, French geophysicist, as quoted by John Mauldin in his Thoughts from the Frontline newsletter. Read Full Article