April 2018 - Time to Build an Ark?

David L. Johanson |

SUMMARY

  • Key interest rate increases.
  • Consumer spending.

In the history of the NCAA Basketball Tournament, a 16th seed has never, ever, beaten a 1st seed...until this year.  During March Madness, the University of Maryland, Baltimore County (UMBC) beat the University of Virginia – not just a number one seed, but the top ranked team in America.

Expect the unexpected in 2018.

The political media has moved in on the financial media.  The big issues in March were trade tariffs with China, the impact of rising interest rates, and Facebook's data selling.  Oh yes, we forgot to add, a little more turnover in the White House.  The media enjoys hyping up the potential problems.  Boring does not sell.

The Federal Open Market Committee (FOMC) meeting in March voted to raise key interest rates as expected by a quarter of a percentage point.  The key interest rate was increased form 1.5% to 1.75%, which is the highest level since 2008.  We do need interest to naturalize from such low levels.

The committee noted that economic activity is picking up in the upcoming quarters.  If the economy is progressing nicely, why the new found stock market volatility?  Why have we had the worst March in 17 years?  Why the first down quarter in the last nine quarters?

As humans we all have a similar dread for uncertainty.  Our brains continuously try to bring order to what seems, at the time, to be chaos.  This can lead to behavior which can cause worry, panic, and often making the wrong investment decisions.

As Advisors, 24-7, we find ourselves continuously analyzing the shifting economic news in search for long term trends.  It is critical to differentiate between news which affects matters on the short-run, versus earth-moving change, that affects markets longer term.

In listening to the talking heads attempt to find simple answers to complex systems, they all try to find answers to short-term headline news and predict the next shoe to drop.  Please ignore these gurus.  They are there to turn heads, create viewership, and make money.

Here is the truth.

The stock market can be volatile and short-term forecasts will be unpredictable.  It is possible that the markets will experience further declines, but it is also possible that it will not.  The declines we have had thus far in 2018 are normal.  Intermittent declines shake out some of the worries.

In any event, we expect volatility to continue this year - to the upside and the downside.  If things get worse from here, the markets should recover.

We are encouraged that the recent price declines provide some buying opportunities.  The S&P 500 is trading at a forward 12 month P/E ratio of 16.6 times, which is pretty reasonable.  In addition, first quarter earning results may surprise to the upside.  Earnings are expected to grow at 16.6%.

With the job market on fire and an increasing participation rate, consumers are consuming.  We just showed the lowest jobless claims in 45 years.  In the long-term, markets are very predictable.  Long-term, the stock market will turn diversified patient investors into wealth building machines.  Trying to time this market, predicting when to get in and out, is a recipe for drowning.

So is it time to build an ark?

Well I suppose the time to build an ark is when the sun is shining.  Biblical scholars are not sure how long it took Noah to build his ark.  It took decades they say.  In any event, we should all think long-term.  Save a little more, spend a little less.  Avoid excessive debt.  Diversify according to our needs.

We hope you have a wonderful April and start of Spring.  If you have any immediate questions, please let us know.