The Big Picture

“Whoa, this is heavy!… There’s that word again, Heavy! Why are things so heavy in the future, is there a problem with the Earth’s gravitational pull?”

From the 1980’s cult classic Back to the Future. Marty used the slang phrase “this is heavy” and Doc, from 1955, not recognizing the slang, took it literally!

It’s been over two years since I posted “The Road to Nowhere” where I referred to the stagnation the equity markets experienced for a full year from 2015 to 2016. During that period we observed markedly worse economic and market data. So far in 2018, I am reminded by the stagnation, but not much else.
It has been just over three months since the peak of the market and I am sensing just a bit of restlessness and anxiety! First off, consolidations, or a prolonged pause in the markets, are a normal occurrence. It gives the market a chance to digest new and changing market factors. What is changing? Let’s explore.
Have a Plan and a Process!

From the Trenches

“Looking back isn’t going to help you. Moving forward is the thing you have to do.” – McKayla Maroney

If I had a nickel for every-time I have been told “I coulda, shoulda, woulda…” That would be a lot of nickels! We move forward.

Are we looking at a period of prolonged stagnation? Have we gone back in time to stagnating markets? For the moment it appears so. What may be the reasons for the pause? I know what is being discussed, however I would humbly argue that many headlines are not as relevant to the markets and economy as many would propose:

  • Trade Wars! A trade war is not beneficial to any country. We are not currently in a trade war. I can assure you that China is not interested in a trade war either. We are there largest customer! The U.S. is not a large exporting country. While a trade war would have an impact, the likelihood of avoiding a full on trade war is significant.
  • North Korea. Last I checked the dictator of the North was interested in burying the hatchet. Don’t cross your fingers just yet as this is not the first talk of longstanding peace. The DPRK has shown to use these olive branches to get some things they want/need then renege. Still a step in the right direction.
  • Political Drama. I think this has been staple nightly entertainment? since the election. Not sure when or if this will subside, not my area of expertise. I can say that the economy, and the markets, do not care as much about politics as many may believe!

Here are some material factors that are more likely impacting the economy and markets:

  • Earnings. We are looking at much tougher earnings comparisons year over year going forward. I.e. The pace of growth slowing.
  • Interest rates have risen materially especially along the short-end of the yield curve. This has flattened the yield curve and borrowing costs have risen. Higher borrowing costs tend to slow economic growth.
  • Inflation has picked up markedly this year. Especially among input costs such as oil. Higher input costs tend to lower margins and lower profits.

Bottom line: Consolidations are normal in bull markets. As underlying factors change, the market may take a breather to digest the news.

The Weeds

We do not see things as they are, we see things as we are.” – Steven Covey

Over years of giving presentations I have found this quote to be spot on. An individual’s specific point of view is shaped by education, opinions, feelings, perspective, and experiences (among many other factors). This behavioral factor explains the differences in how one individual visualizes an item over another.

Below is a visual update on the current market correction. Keeping with “Sine Waves” theme from the March 13 post; The S&P 500 is nearly flat for the year. The correction that began in January has begun to settle down in volatility but remains in a consolidating price range.

S&P 500 Jan. 1, 2018 through May 2, 2018. 

What is the prescription for a consolidating market? It is a good time to review your overall allocations, consider rebalancing, as well as look at any opportunities that may have emerged as an outcome of the correction.

Bottom Line: This has been a normal corrective pattern in the markets followed by a consolidation in price. When a market doesn’t return to it’s prior rally promptly, it may take a catalyst to break the consolidation.