Driving to work this morning, I thought of the recent market volatility. In an attempt to relax, the upcoming Thanksgiving feast filled my mind. Our family will be fortunate to have a variety of fixings surrounding the traditional turkey: mashed potatoes, sweet potatoes, green beans, stuffing, cranberry sauce, and so on! Yet being a simple man, I typically focus my efforts on devouring dark meat, stuffing, and cranberry sauce, leaving the rest for my family and friends. Taking the same approach in assessing the recent volatility, the following is a simple list of six market-related items for which I am thankful.
I am thankful for uncertainty.
No, really. This provides investors with a healthy dose of the unknown, to counterbalance the fundamentals of which we are always so very convinced! Uncertainty causes us to hedge our bets in a balanced portfolio structure, diversifying the risks while focusing our investments on the longer term.
I am thankful for volatility.
That’s right. Periods characterized by volatile markets are a normal course of investing, serving as a reminder to investors that the pendulum should never swing too far in any direction. Volatility also provides policymakers, corporations, and investors with market signals indicating collective displeasure, often necessitating a corrective course of action.
I am thankful for policy.
Whether monetary or fiscal, policy plays an important role in economic and market activity. Considering trade, interest rates, and deficit spending, we look for the aforementioned corrective course of action in the tariff talks with China over the coming weeks. In addition, Federal Reserve (Fed) policy may be less aggressive in 2019 than currently feared, thanks to the absence of threatening wage growth and the increasing gap between U.S. and global interest rates (contributing to the U.S. dollar’s strength). On deficit spending, well, two out of three ain’t bad!
I am thankful for economic growth.
As the initial surge from the 2017 Tax Cuts and Jobs Act moderates, we look for economic growth to adjust downward only slightly in the coming year, with strength in employment, consumer spending, business spending, and government spending helping to sustain the economy’s momentum. We expect global gross domestic product to be driven by emerging economies, offset by weakening demand from developed markets.
I am thankful for gradually higher interest rates.
Though a spike in interest rates caused heightened market volatility several times over the past year, we believe gradually higher rates signal an improved path for economic activity. We look for the Fed to be less aggressive in 2019 than consensus projections currently indicate, leading the benchmark 10-year Treasury to trade in a range that is modestly higher than current levels. Suitable fixed income investors should consider focusing on securities with lower interest rate sensitivity and higher credit quality.
I am thankful for corporate profits.
Companies in the S&P 500 Index have generated profit growth in excess of 20.0% over the past year. This reflects higher sales growth and increased efficiencies that have led to higher profit margins and improved economic activity. Though concerns about dollar strength, tariff costs, and waning tax impacts have weighed on investor sentiment, we still look for above-average earnings growth in the coming year. We believe stock market gains should reflect this growth in earnings.
To sum up, though market volatility may continue in the coming weeks and months, we at LPL Research believe it is important to focus on the many fundamentals supporting growth in the economy and corporate profits. Uncertainty may persist, but market signals can provide policymakers, business leaders, and investors with the direction necessary to pursue the best results. There are always competing forces, but a simplified approach for investors, similar to the six items mentioned above, may be the best course of action. And speaking of courses, during my meal I expect to have a second course of dark meat, stuffing, and cranberry sauce. Yes, out of a can. Happy Thanksgiving!
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
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