We’ve had a crazy 2018, no doubt. We went from high single digit returns in late September to a down market. We have been treated to an extended period of strong market appreciation, coupled with a nearly unprecedented volatility.
What happened in 2018? The yield on the 10-year U.S. Treasury has been reacting to strong economic growth, an upward creep in market-based measures of inflation expectations, several Federal interest rate hikes, and the possibility of at least one or two more this year. In addition, the trade negotiations with China is another major reason.
What’s behind the volatility? The fundamentals have been excellent—global economic growth, very low unemployment rate, earnings growth, low inflation, and still historically low interest rates. It’s a perfect confluence of events that has been priced into the market.
As Josh Brown, author of The Reformed Broker, so aptly sums it up, “Some people are selling because they aren’t people at all, but software programs or computers that have been programmed to sell when others are selling,” i.e., algorithmic program trading.
I would be more concerned if the recent sell-off was tied to a sharp slowdown in economic growth, much weaker profit guidance, or a systemic event in global markets. Instead, it feels like the news media is creating fear, which creates selling, which creates more selling. This eventually leads to a fear-based pullback that sometimes ends up leading to buying at lower prices. Volatility may be hard to deal with, but ultimately it is volatility that creates opportunity and historically has been supportive of the market.
We’re now in the midst of a long overdue correction which has led to the beginning of a bear market. Corrections are a normal, and believe it or not, a desirable part of a healthy market. I want to remind you that markets go up and market go down but the long-term trajectory of the markets is still up.
I think there is anxiety about potentially slowing economic growth. Clearly, it's a time of uncertainly both here and abroad, but given the strength of our economy, I believe it's going to take more time until the economic backdrop supports a deeper bear market.
Lastly, I want to thank you personally from the bottom of my heart for your continued support of Webb Financial Group. Our firm continues to grow through your generous referrals of friends, family, and business associates. I see this as an acknowledgement of our relationship with you and the service we provide. It is our great privilege to serve you. We look forward to another great year of working together in 2019.