2018 Q1 Market Commentary

“Stocks post worst start to April since the Great Depression”

Do I have your attention? This was a headline posted to CNBC.com at 2:27pm Eastern on April 2nd. Indeed, the S&P 500 (a broad measure of U.S. stock market performance) closed down 2.2% on Monday, April 2nd and had the worst second quarter start since the Great Depression. While this statistic is interesting and attention-grabbing, we need to keep it in perspective. This drop marked the fifth worst trading day of the year – not the first – and the index recovered those losses in the next two trading sessions. 2018 has indeed been a volatile year. Over the past two decades we have averaged 35 days per year during which the market moved up or down by 1%. Last year we experienced a record setting eight days. This year we have already experienced 29 days, nine of which occurred in March. We are witnessing the return of normal volatility, emotionally amplified by constant media attention.

It is often said that panic is not an investing strategy, but the media often takes the opposite view, as they breathlessly run to report “breaking news” and air “markets in turmoil” specials after particularly volatile days. It must work to gain viewers, just as my opening line worked to grab your attention, or they wouldn’t do it.

Stocks have taken a series of hits in recent weeks. One week the culprit seems to be concerns around a handful of tech stocks. The next, tough rhetoric and concerns on tariffs and a global trade war. Despite the dire headlines of a potential trade war, current negotiations seem to be aimed at getting better and fairer trade deals in place. It is important to remember the North American Free Trade Agreement (NAFTA) was originally implemented in 1994, 24 years ago. That same year, Netscape appeared on the scene as the world’s first web browser, years before the tech bubble, before 9/11, and before the housing crisis. Steve Jobs had yet to return to Apple, and the iPhone was still 13 years away. The world is a fundamentally different place today, and it makes sense from an economic perspective to review and update the terms of potentially outdated trade agreements as necessary. China has also been a hot headline. After the United States’ opening salvo of proposed tariffs on roughly $50 billion worth of Chinese imports, China responded with proposed tariffs on $50 billion of U.S. imports. President Trump followed suit by considering tariffs on $100 billion of Chinese goods. In all of this reporting, one word is often overlooked: “proposed.” The tariffs will not go into effect immediately, and we believe both sides will continue to negotiate.

On top of concerns over a trade war, we now have the possibility of an actual war. Although markets had an initial negative reaction when President Trump warned Russia about missile strikes in Syria, we also have a 25-year long history of U.S. missile strikes which we can use to assess the potential market impact. According to an April 2018 Charles Schwab study, stock market reaction was most often slightly negative on the first day of missile strikes with the market typically recovering the losses within five days. We don’t believe short military action in Syria will have a lasting impact on the markets, unless it turns into a more protracted endeavor.

There is a silver lining to market volatility and alarming headlines. According to the April Ned Davis Research Crowd Sentiment Poll, conditions have moved from the “extreme optimism” zone to the cusp of the “extreme pessimism” zone. This shift in opinion takes some of the euphoria out of the market and lessens the likelihood we will experience a stock bubble. In addition, the recent selling has helped to alleviate expensive valuations as the forward price/earnings ratio (P/E), a measure of stock valuations, for the S&P 500 has moved from over 18 to roughly 16 as of early April, according to Thompson Reuters – not historically cheap but much closer to median historic levels. Moreover, we believe Europe remains at attractive valuations; their economic recovery still lags behind ours, which should provide room for further overseas market growth.

What is an investor to do with all this information? When volatility gets high, the best approach is to keep calm. Don’t be tempted to buy the dips because finding the bottom can be very difficult. Don’t sell when things get a little wobbly; take a look at your long term allocation and make small changes as necessary. Take opportunities to rebalance. Most importantly, don’t panic and keep focused on your long term objectives.

The views and opinions expressed are of White Horse Advisors, LLC. This commentary is provided for educational purposes only and should not be construed as investment advice. White Horse Advisors is an investment advisor firm located in Atlanta, GA.