As you may recall, Capstone has been writing about the unusual and bizarre lack of volatility in markets over recent months. Markets meandered steadily upwards for over a year without any of the normal volatility and pullbacks that you would expect.
SPOILER ALERT! The period of unprecedented calm has ended. The past six trading days have seen the market turn negative
with rapidly increasing volatility. Yesterday saw an unprecedented plunge in the Dow Industrial average* for one day. Stomachs are churning and fear mongers are licking their chops. It took only a couple days for Money Magazine to have an article titled “Why the Market is Crashing Now…”. Crashing?? As this point, that would be as large an overstatement as is possible. The market is experiencing its first correction in a long time, but in no way would this be conceptualized as a
crash.
You have a right to be stunned by this rapid turn of events in the market. We have all been lulled into a complacent, euphoric state by the market this past year, so trading it in for sirens and a Mad Max world is very unsettling.
What has caused the market downturn? The three likely suspects are fears of rising interest rates, inflation, and the departure of Janet
Yellen. Yellen provided a steady hand, experienced leadership, and continuity between administrations. While new Fed Chair, Jerome Powell, has signaled that he will lead in a similar fashion he is a less known quantity.
What do we expect next? While we do not know when the market volatility will subside, we do not believe there has been a large change in economic fundamentals. Despite market fears, we expect interest rates and
inflation would only rise in a measured way. Economic growth remains good and corporate profits remain excellent. The current pullback is actually a return to normalcy and an indication of the market rising too far and too fast, thus a correction. Markets normally take two steps forward and one step backward. Remember, “humans have a bias toward recency, an inclination to let recent experience shape our expectations for the future” as Neil Irwin in the New York Times points out. Recent market
performance has clouded our expectations for future outcomes. The reality is that over time markets are volatile and have a long-term upward trajectory.
While we are glad to meet with you to review your plan, we do not see a game changer in this market correction. Please give us a call to make an appointment if you would like a review.
* An unmanaged index of 30 large U.S.
stocks
