Stock market volatility is back. Better get used to it.
I spent a good part of my Super Bowl Sunday afternoon outside in the rain at my smoker and on the grill preparing dinner for the friends and family that had gathered at my house to watch the NFC Champions Philadelphia Eagles take on the AFC Champions New England Patriots. Las Vegas had odds on the Patriots before the game by 4 ½ points over the Eagles. The “experts” are never wrong, right? As I stood there in the rain holding an umbrella in one hand and tongs in the other flipping over my barbeque chicken I thought “maybe a great football game would help to take all of our minds off of the recent stock market losses”.
Wishful thinking. The markets continued their slide the following week in one of the most volatile weeks the stock market had seen in years. Most “experts” (CJM included) have been calling for a technical correction going back 2 years now. We seem to have achieved this feat (finally) after 2017’s amazing run in the markets. Could 2018 be the year that central banks finally begin the process of tightening monetary policy rather than just talking about it? Could markets be waking up to the fact that after 10 years and tens of trillions of dollars in depressed interest rates (and QE) that the easy money period may be over?
This new period of coordinated action from global central banks should work to restrain global equity markets in the coming years. It will also lead to more stock market volatility than we have experienced (or can remember) in recent history. This does not necessarily mean that the U.S. is headed for recession in 2018. What it does mean is that we need to be prudent, rational investors and not “get greedy” (as my dad likes to say). The recent rise in interest rates, combined with volatility and coordinated central bank action, has put us all on notice. 2017 is in the history books. 2018 will be very different.
Back to the Super Bowl….
I dug the following out of the February 5, 2018 edition of Barron’s. “According to Ryan Detrick at LPL Financial, the S&P 500 performs better when an NFC team wins, with an average gain of +10.8%, versus +5.8% when an AFC team emerges victorious. An NFC win translates into an up year for the S&P 500 81.5% of the time (22 stock gains out of 27 victories; since the NFL merger), versus 62.5% (15 up years out of 24 wins) for the AFC”. There you have it. Scientific proof that when the NFC wins the Super Bowl markets are higher most of the time within 12 months.
In short, the economy is just as good today as it was a month ago. The only real difference is that equities are more reasonably priced (you will notice I didn’t say “cheap”) at this point (see chart below). And while the short-term pain to reprice may or may not be over with, corporate profits haven’t changed and that bodes well for the rest of 2018. But it’s going to be volatile at times.
I never thought I would type the following so here goes….
Fly Eagles, fly.
Source: The Bespoke Report. Tuesday 2/13/2018