There is a tiny amount of volatility back in the markets—well, maybe not so tiny. What does it mean? Is it just a pull-back that we will rebound from shortly? Will it just be another volatile year where nothing really happens? Or…are we headed for a recession?
If you are familiar with the 24 Hours of Le Mans, you might know it is also referred to as the “Grand Prix of Endurance and Efficiency.” This race is unlike most races. It is not about time. As the oldest sports car race in the world, it began in 1923 to prove durability for car manufacturers. This brutal race is a competition of what car will go the furthest distance in 24 hours. Since the 1970’s, cars racing in the Le Mans have topped 200 mph. It is also a race that is not finished by some or many. The lowest percentage of finishers was in 1970. Only 7 out of 51 finished the race. This is a mere 13.7%.
You can only push an engine full throttle for so long. If you don’t let off the gas, eventually something will give out or blow up.
The markets were full throttle over the past year. Check out these returns:
- Russell 1000 Growth: 36.39%
- S&P 500: 31.49%
- Russell Midcap: 30.54%
- MSCI Al Country World Index: 26.60%
- Russell 2000: 25.52%
- Russell 2000 Value: 22.39%
- MSCI EAFE: 22.01%
- MSCI Emerging Markets: 18.42%
- Bloomberg Barclays US Agg: 8.72%
- Gold: 18.87%
In 2019, you could throw a dart blindfolded at almost any market and make money. But like Le Mans, letting off the gas is not a bad thing. Otherwise, something will give out or blow up.
There are two primary things currently affecting the market. The first of which is on just about everyone’s mind worldwide — Coronavirus. Every media outlet is blaming the virus for the volatility. And then there is the other contributing factor - America is feeling the “Bern.” Last week we discussed the effects of a blue wave hitting D.C. and Bernie Sanders being elected. If you missed it, it is a must read. Better yet, listen to our podcast in which we discuss this in conjunction with the markets. Sanders’ high regulation and high tax point of view is a far stretch from the capitalist environment Trump has created for the markets. This will mean a ton of readjustment for companies and it will cost money to do it.
Still, we don’t believe the markets are headed for doom and gloom. Our economy is fragile, which we also talked about last week. However, there is a lot of good happening:
- Job growth is plentiful. Almost every major city is adding jobs.
- Unemployment was at a 50-year low in December at 3.5%.
- Income is up. At the end of 2019 wages and salaries were up 2.9% for the trailing 12 months.
- Consumer spending is still climbing steadily as are retail sales. 4.
- Inflation is in-check. The Core Consumer Price Index, which is all items less food and energy, ended the year at 2.2%.
- Property values are on the rise.
- Building permits are on the rise.
- S. Corporate Profits are on the rise. 3.
- The Federal Reserve is keeping rates low and may even lower rates again.
The important thing to remember is to ask “WWWD?” What Would Warren Do? Volatility is driven by fear and greed. Warren Buffet, the alleged greatest investor of all time, tells us we should buy fear and sell greed. Fear is dominating. It pushes aside all reason and logic. It is possibly the most dangerous threat to your future. It tells you to sell out before we are raising chickens in our back yard and milking the cow just to survive. However, is the likelihood of that actually happening logical?
Remember what makes up the markets—companies, real companies, that meet the demands of what people want and will buy. These are businesses with owners and CEOs who don’t want a chicken coop in their back yard either. No matter what politics or other outside forces do, their job is to find a way to be profitable. They follow the simple rules of supply and demand and find the cheapest way to do it. Furthermore, you - as an investor, have the choice of what businesses you invest in. Whether it is a fancy technology stock or a stock that simply sells toothpaste, the choice is yours.
Our job is to help our investors pass the sleep test, which is the simple question: Are your investments keeping you awake at night? If you can’t pass it during both good times and bad times, it might be time to get a second opinion. We have endured the ups and downs of the markets since 1989. We keep disciplines in place so fear and greed stay at bay. And our experiences over these last thirty plus years have taught us to be comfortable with our disciplines.
You need a plan; you need discipline, and you need experience to carry you through when the going gets rough. Take this volatility as a warning to get your investment house in order and your emotions in check before something gives out or blows up.
- Index Returns: https://www.lazardassetmanagement.com/docs/-m0-/171/AnnualReturnsOfKeyIndices_LazardInvestmentFacts_2019_en.pdf
- S. Bureau of Labor Statistics
- Bureau of Economic Analysis
- S. Census Bureau
- Standard & Poor’s