FAM's View on the Market Volatility
With the market volatility this year, we have seen more ups and downs than we would like. In today's world of social media and instant communication, it is a tough balance of knowing when to send out something regarding the markets. In past times of volatility, when we send a letter regarding it, some clients will say they weren't concerned until they saw us sending something. On the other hand, if we don’t send something, others will ask what is going on and we should send something.
After opening the Sunday NY Times and seeing an article on page one, "The Best Place to Put Money? Your Mattress", and then seeing the front page of the Styles section (yes, the Styles section of all places) lead off with "Assume Crash Position", it's time to send our view of what is going on.
This is not 2008 or 1929 or the end of the world. Unemployment is low, job creation has slowed but still continues, interest rates are on the rise, China is slowing, we are in a trade war, and the news, both good and bad, goes on and on and on.....
There is always something to find concern about. A simplistic analogy I have used this year, imagine driving down the highway at 90 mph and tapping the brakes to slow down to 75. That is what the Fed is doing by raising interest rates, trying to slow the economy down to avoid an overheating economy and high inflation. The concern is over reacting where rates go to high and the economy slows too much. On the flip side, not doing enough and the economy overheats leading to more problems. It is a difficult balance that Fed policy makers always have, no matter who is in charge. Recessions (defined as six months of negative economic growth) are inevitable. There is no magic formula to avoid these slowdowns. The question is how hard of a landing do we have. You may remember the term soft landing, where the economy slows to a manageable speed. Will that happen this time or will we have a harder landing? Time will tell, but we are still seeing economic growth in the U.S. There are signs that the economy is strong but slowing in some sectors. Using my driving analogy, we are seeing signs of slowing to 65, the current speed limit. The challenge by the Fed will be to avoid slowing the economy to a crawl.
The reality is that the economy will eventually go into a recession. However, this can actually be good for the economy since it returns it to a more sustainable efficient place. Recessions can be long or short, but most tend to be shorter. Often, we do not realize that we were in a recession until it's already over.
Regarding the markets, the volatility is unnerving. Headlines in the news does not help comfort the average investor. However, selloffs and corrections are always going to be part of it. As we always say, we are in it for the long term and try not to get caught up in the minute by minute, day by day news. Keep the focus on the long term. This is not 1929 or 2008 all over again.