Those are the questions many investors are asking themselves after the worst December for US stock markets in decades. Despite record setting levels going into the fourth quarter, they saw markets give all that back and then some. For the quarter, the S&P ended up off nearly 14% from its high, the Dow was down nearly 12% and the Nasdaq fell over 17%. Foreign stocks shared a similar fate, and oil prices are off nearly 40%. All of this was against a backdrop of pretty solid economic data across the board.
Payrolls and wages were up, unemployment continued to decline, auto sales and capital goods were steady and holiday sales were the best seen in 6 years. While we can point to fears about monetary tightening, turmoil in Washington or trade uncertainty, none of these were new. And, are any of these enough to explain such seismic shifts in markets? We believe you have to look past the fundamentals to see what moved the markets in December.
At least one factor is the changing mix of investors. Passive investors and short-term traders have grown relative to active investors (who focus on fundamentals like corporate earnings and the business backdrop). Because of this, the market is increasingly moved in the SHORT-TERM by market momentum and computer algorithms. This is especially true when trading volumes are lighter, such as holidays. While the market may correct sharply during such periods, if the market pullback isn’t justified by a legitimate deterioration in economic conditions, the correction isn’t likely to endure, and eventually investors will again focus on the underlying opportunity.
But can the market itself shift fundamentals? With the loss in stock market value, certainly consumer confidence and household net worth have taken a hit. But, the huge drop in oil prices is likely to be felt by consumers in a good way at the gas pump, helping offset some of their stock market woes. Consumers are also getting some help from the Fed, which is now indicating a slower pace of interest rate hikes for 2019 than even a month ago (and the market is actually pricing in NO hikes at all for 2019). Finally, we have the possibility of additional money in consumers’ pockets in early spring due to tax refunds under the 2018 tax cuts.
In short, we don’t believe this market turmoil will move the fundamentals. While you need to remain vigilant for signs to the contrary, at this time, we believe this is the type of turbulence to monitor rather than react to. It is a time for discipline and revisiting your plan, your goals and your attitude about risk. If none of these things have changed, your plan and portfolio probably shouldn’t either.
The opinions voiced in this post are for general information only and are not intended to provide specific advice or recommendations for any individual. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results.