Just when we thought we were in the middle of a “quiet recovery,” the stock market once again dipped, showing increased volatility.
What caused it this time? Was it the tech sector, housing, interest rate fears, the price of oil? It certainly wasn’t earnings; they were good for many corporations and the mid-May market downturn really didn’t reflect that.The market has been on a roller-coaster ride since February, with volatility marking most reporting periods and wild swings in both positive and negative directions becoming the norm. The downturn on May 15, after a general swing in the positive direction was caused, according to some analysts, by 10-year and 30-year bond yields breaking the 3 percent barrier, even though the bond market had briefly flirted with that level in April.
Could the rising price of oil also have been a factor? Not likely. New drilling rigs are going on line every month, helping to keep oil prices stable. The oil price that day was $71 per barrel, up more than 70 percent over the last year, but down slightly from earlier in the week.
Yet, while much media attention is focusing on daily swings and how the market looks compared to its record highs, the market’s foundation, the financial health of the companies that comprise the various exchanges, seems mostly disregarded. Stock prices in many cases have not responded favorably to the positive earnings reports from so many companies. In fact, in some cases, rather than being positive, some reactions have been negative.
There are valid reasons for the market’s lack of response, primarily the position taken by many analysts that the market had gotten ahead of itself and was overvalued. The rapid increase in stock prices in 2017 and early 2018 began to seem impossibly high.
Adding to the fear of success were rising interest rates and concerns of inflation, either of which can impact stock prices. Still, thanks to the reduction in corporate tax rates, earnings for many companies were extraordinary, but the earnings for many firms were excellent even without the tax break, with nearly 80 percent of the companies in the Standard & Poor’s 500-stock index exceeding expectations.
So why, then, does the stock market take a nosedive with virtually every hint of negativity? One answer that sums up the uncertainty of the markets could be “jitters.”
And when the market turns and rises, we hear it “shook off the jitters” and had a good day or even a good week. The cause of these jitters can be as diverse as events on the international stage to difficulties encountered by a company changing its strategy.
Basically, my advice to investors who are interested in certain market segments or companies is the same as it would be in other periods: Do your homework, exercise due diligence, research the companies or areas that have captured your interest and think for yourself.
Despite recent volatility, the markets still hover around all-time highs and synchronized global growth suggests there’s still life in this bull market. If the foundations of the economy are strong, and the performance and outlook of the companies are also strong, you’re probably on solid ground. Others may have “jitters,” but history is replete with success stories of those who stood strong while others derided their decisions. Quite often, the mockers missed the boat, while the winners were taking action and succeeding.
Wealth management is about planning for the future. Diversification and management of risk remain key to meeting lifetime goals.
Lisa Santo is a financial adviser with the Global Wealth Management Division of Morgan Stanley in Manhattan and can be reached at 212-883-7707. She is a resident of Sleepy Hollow.