Our Thoughts on Today’s Volatility
Written by: Ryan Bouchey
As I write this, both the Dow and S&P 500 are down about 1.75% for the day as we experience one of the only volatile days in the market all year driven by the news out of Washington revolving around President Trump and James Comey. Believe it or not, following Trump’s election we’ve only had three days in 2017 of the stock market moving up or down greater than 1%. Based on our experiences this year, we aren’t used to this sort of volatility. Should today’s market worry us as investors? We don’t think so. Most of the coverage today seems to be overblown and here’s why.
The Economy
We continue to see strengths in the economy, even eight years into the recovery from the housing crash of 2008 and 2009. So far in 2017, we are still averaging 185,000 new jobs being created each month which is encouraging. The unemployment rate is down to 4.4% and as the labor market continues to tighten, we will see wages rise as employers compete with each other to get the best employees available. Increased wages may have played a part in last week’s U.S. retail growth of .4% month over month in April – the highest gain so far this year. Not only are wages up, but debt burdens are down for the U.S. consumer with consumer debt payments as a percentage of after-tax income at its lowest rate since the early 1980’s. These are all positives in the current economy, and let’s not forget that the U.S. consumer makes up over two thirds of our GDP so a stronger consumer should drive a stronger economy.
Stock Fundamentals
Stocks continue to be the best asset class, with the S&P up over 6% for the year. The big question we get when it comes to stocks now is “are they overvalued?” Looking at the past 25 years, stocks are slightly over-priced, with the forward Price-to-Earnings (P/E) ratio hovering over 17 times earnings when the 25-year average has been about 15.9 times. Are we concerned we’re in a bubble with these valuations? Not yet. The tech bubble of 2000 stocks were trading at 25 times earnings, which we are nowhere near. The market crash in 2008 was driven primarily by the financial and housing collapse, less so from overpriced stocks. We also need to take into account room for companies’ earnings to grow. Already in the first quarter, U.S. Large-Cap companies posted an increase of nearly 14% compared to a year earlier; these earnings gains will support current valuations. We have become slightly more defensive in our equity holdings over the past year in the portfolio, but overall we feel this market environment still has room to run on the upside.
The current dysfunction in Washington seems to be driving today’s market selloff, but will it have a huge impact on our economy and stock market? It shouldn’t long-term. Worst case scenario is that if Trump gets impeached (which some folks are saying is a possibility) – does Mike Pence make our economy any worse? No, and he could actually be the better president with many of the same fiscal policy initiatives with less of the uncertainty Trump brings to the office. Wall Street doesn’t like uncertainty, as we are seeing today firsthand. Over the past 35 years, the stock market has averaged a 14% drop each year. We haven’t experienced even a 5% drop since July of 2016. Today’s trading and drop of 1% shouldn’t scare us, and even if it continues for the next few days or even weeks, we won’t panic. Volatility is common in the market and with continued strength in the economy and solid stock fundamentals, we don’t feel like now is the time to make any major changes.