Is the bull market over? In the first quarter of this year, the U.S. investment markets have experienced the first correction (a decline of 10% or more) in three years. The VIX index (known as Wall Street's "fear index") had its biggest quarterly jump since 2011, rising 81%.
The downturn hit most parts of the market, both domestically and globally --
- The Wilshire Total Market Index finished the quarter down 0.76%.¹
- The Russell 1000 Large-Cap Index fell 0.69%.²
- The Russell Midcap Index dropped 0.46%.²
- The Wilshire U.S. Small-Cap Index lost 0.73%¹
- The EAFE (Europe/Australasia/Far East) Index went down 2.37%.³
- The Wilshire U.S. REIT (Real Estate Investment Trust) Index fell 7.42%¹
The reasons are varied. Some are due to Trump's self-inflicted wounds --
- The White House is in chaos. Thirty-seven staff have been fired by President Trump, or have left on their own since the inauguration, eleven just since January.
- Trump is at risk for impeachment for one or more violations -- collusion with Russia, obstruction of justice, and/or illegal campaign financing.
- Trade tariffs on steel and aluminum and on Chinese products announced by Trump have created uncertainty. Even if these tariffs are quietly walked back and amount to little in the end, they have caused a temporary roiling of the markets.
Some of the volatility has resulted from a strong economy --
- The unemployment rate is near record lows.
- Salaries have risen 3%, and 18 states have increased their minimum wages.
- Companies in the Standard and Poors 500 index of the largest U.S. firms are enjoying a 7.1% boost in earnings in the first quarter of this year, the quickest rise since 1996.⁴
Because of the robust economy, Jerome Powell, the chairman of the Federal Reserve Bank, has announced that he will likely increase interest rates at a faster pace than he did in 2017. This is a reasonable and prudent move. The Fed would like to see controlled growth, as opposed to runaway growth that could spark inflation. However, his announcement was one of the causes of the current volatility.
One of the keys to understanding the current market is not to panic, and to view current events from a long-term perspective --
- The VIX "fear index" although higher than last year, is now near its historical average. In other words, the current volatility is "normal" compared to the steady, uninterrupted growth we had last year.
- A big concern last year was that stocks were overvalued. That is, the Price Over Earnings (P/E) ratio was inflated at 18.6. That means that the price of one share of stock was 18.6 times projected annual earnings. After the correction in the last quarter, the P/E ratio is at a more reasonable 16.1. Because of this, we might be able to avoid a more severe bear market later on.⁵
- Corporations profited from a huge tax cut, from 35% down to 21% in the new Tax Law. The benefits of the tax cut are going to be felt later in the year. Consequently, the strong earnings by corporations in the first quarter can only get better.
Most investors are trying to accomplish long-term goals, intending for the growth of their investments to fund college for their children, a home purchase, or retirement. Because of a better diet, more exercise, and improved medical care, many couples spend 25 to 30 years in retirement. Over a long period of time, the ups and downs of the market even themselves out, and the potential for a good return becomes more predictable.
The increased volatility in the first quarter is just a reminder that the market never goes up in straight line. The bull market that we had last year was only temporary. If we enter a bear market, when stocks go down, that will end too. In the context of long-term goals, the performance of the market during a quarter or even a year shouldn't scare you from sticking to your plans.
¹ Wilshire index data: http://www.wilshire.com/Indexes/calculator/
² Russell index data: http://www.ftse.com/products/indices/russell-us
³ International indices: https://www.msci.com/end-of-day-data-search
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