Market volatility is picking up. The question is: Should we be worried? For those who will need to tap their portfolios for spending needs, it surely makes sense to have reserves on hand. For longer term investors, however, the question is more complicated with an answer that is more related to theinvestorthan the market.
As usual. there are positive and negatives in the market and the economy.
On the negative side
- The tech sector's leadership in the stock market is fading.
- Elections around the globe promise more volatility.
- The US consumer (2/3 of the US economy) is showing signs of tiring and credit delinquencies are climbing.
- Job growth is weakening and the unemployment rate climbed to 4.3%
On the positive
+ Elections haven't historically had much impact on the market's direction.
+ The Federal Reserve may start an easing cycle in September.
+ Prices fell last month 0.1%, and 12-month inflation is below 3%
+ Corporate profits have remained generally robust.
Yes, the economic cycle is becoming "mature". But after two years of the Fed trying to slow the economy down, should we be surprised?
We shouldn't. As shown below, this was anaggressivecampaign to tame inflation, and it appears to have worked without too much collateral damage. But signs of economic weakness mean that the Fed, who was "behind the curve" on battling inflation may again be late in cutting rates before more damage is done.
So, what are investors to do with this information?
A maturing economic cycle doesn't mean bad things over the long term. After all, many US companies have navigated adozencycles, and those who are well capitalized almost always come out on the other side.
But what about the possibility of recession? Well, those are notoriously hard to predict, too. In fact, in 1966 famed economist Paul Samuelson wrote inNewsweek, "Wall Street indexes predictednineout of the lastfiverecessions." So, investors are wise not to try to "outsmart" them.
At certain points in time, trends break down, and a "tug-of-war" erupts between forces and and opinions. This creates volatility in the short term. It is also normal, albeit unsettling. Remember that volatility comes in bull markets, too. In fact, EVERY bull market has had a 10% correction at some point.
It's also called "Wall of Worry". Markets must climb it to eventually go higher.
So, keep this all in a historical perspective. Make sure that your allocation is appropriate for your goals and your tolerance for volatility. And hold on for the inevitable bumps to come.