by Mark Holloway & Paul Stropkay
Stock Yards Bank Wealth Management and Trust
April 3, 2018
Dear Clients and Friends,
We were all spoiled by last year’s 21% return and low volatility in the stock market. Yesterday’s 458 drop in the Dow was just the most recent of several days with large point declines in the major stock market indices that began with the 1,032 point drop on February 5th. The market is now down approximately 3.0% year to date.
Market volatility is traumatic for investors who forget that, while stock prices may be erratic, the fundamental value of quality businesses is actually quite stable. Over time, price and value tend to converge. Alert investors can take advantage of opportunities that price volatility provides. We are encouraged by the growth in corporate profits that we are seeing this year and remind ourselves that stock valuations are reasonable in the context of history.
That said, what is causing the wild market swings? Increasing interest rate expectations from the Federal Reserve have added a level of uncertainty. Late last year, most analysts believed that we should expect two and possibly three increases in rates during 2018. That expectation is now up to four increases based on the strength of the economy and renewed inflation fears related to full employment. Full employment generally brings increasing wage pressure and has historically been an omen of future inflation. Increasing interest rates are a threat to economic activity, increase costs for companies that borrow, and pose competition to stocks for new investment dollars.
Secondly, the drama and political turmoil in Washington has added to uncertainty. The high rate of turnover in key areas of the Trump advisory team including Secretary of State and Chairman of the Economic Advisors rattled the markets. The failure of Congress to pass an acceptable budget also added to the feeling of political dysfunction.
The third and most important cause of the recent volatility is the discussion of tariffs. The Trump administration wants to impose tariffs on imported steel and other products. Tariffs are essentially taxes on imported goods. Exporting countries seldom sit by idly and accept these taxes. They retaliate with tariffs of their own. Remembering our economic history, tariffs were one of the reasons the great depression was so severe and prolonged. The global trade war that resulted set back economic growth for a decade. Fear of slowing global growth resulting from a new trade war has rattled markets. We can only hope that this is part of the “art of the deal” and that the new administration is trying to force our trading partners back to the negotiation table.
We still believe that we are in a secular bull market for common stocks. A secular bull market is a market in a general uptrend with higher highs and higher lows in absolute index price levels. This does not mean that there will not be corrections. The attached chart shows that stock market declines in secular bull markets of 5%, 10%, or even 20% should be expected. Larger declines have only happened during recessionary periods. There are no signs that the economy is heading for a recession in the near future. In fact, economic growth is accelerating.
It is important to keep things in perspective. The 500 point drop in 1987 represented a 21% decline. The nearly 500 point drop yesterday was only a 1.9% decline on today’s much higher market level.
Remember, no one can time the market. It is against human nature and too many consecutive correct decisions must be made very quickly to ever be successful. It is important to stay invested for those good days that make all the difference in portfolio performance. As the attached chart shows, many times these bounce-backs happen immediately after days like yesterday.
We appreciate your continued trust and confidence.
The Wealth Management & Trust Group
Stock Yards Bank & Trust
The Wealth Management Group
KATHY THOMPSON, J.D., Senior Executive Vice President, (502) 625-2291
E. GORDON MAYNARD, J.D., Managing Director of Trust, (502) 625-0814
MARK HOLLOWAY, CFA, Chief Investment Officer, (502) 625-9124
SHANNON BUDNICK, CTFA, CFP®, Managing Director of Investments, (502) 625-2513
PAUL STROPKAY, CFA, Chief Investment Strategist, (502) 625-0385
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE