Oh, hello. Did you miss me? So, what did I miss while I was gone?
Only the worst market week in the past 5 years. What timing.
After more than 1,100 days, the long awaited market correction arrived on Wednesday, Oct 15th. Even though we knew it was coming, it was still hard to look at…but because we were prepared, we did not react the way that the media hoped we would. Plus, if you blinked for a few days, you might not have noticed that anything happened with the bounce back and new all-time highs today. A reminder that reacting to short term volatility when you have a long-term plan in place is risky business.
So, why the volatility? Reasons include: 1) softer than expected economic data from Europe and China; 2) weakness in commodity prices, particularly crude oil; 3) fears of the spread of Ebola; 4) a rapidly rising U.S. dollar vis a vis other global currencies.
If Europe were to slip back into recession, we believe it would be a mild one with only a small impact on the North American economy. The recovering U.S. economy, the largest in the world, is likely to deliver enough growth to keep the rest of the world afloat. A strong U.S. dollar also means the U.S. Federal Reserve has more room to leave interest rates lower for longer, a strong stimulant to the U.S. economy. While the decline in crude oil prices from over $100 at the beginning of the Summer to the low-80's currently is bad for energy producers, keep in mind that lower prices at the gas pump means consumers have more money to spend on other goods - and consumer spending represents 2/3rds of U.S. economic growth (with Government and corporate spending making up the balance).
Finally, while certainly tragic, the likelihood that Ebola will shift from a West African problem to a global epidemic remains very low, as infrastructure elsewhere in the developed world is far better equipped to deal with an outbreak (that said, we are almost certain to see more cases in North America and elsewhere and the stock market may react negatively to this news flow).
While negative headlines are hard to ignore, we continue to believe that the intermediate and long-term set-ups for stocks is compelling. Like the wise Mr. Buffett is known for saying, “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” meaning that the time is now for investors is to build a list of good businesses with sustainable, superior earnings growth, as corrections usually produce some price weakness even for these strong businesses and provide a rare opportunity to buy them “on sale.”
Click here for a great report by my brainy Portfolio Advisory Group which outlines the global economic backdrop, headline risks and what it all means for stocks.