Should I Be Worried About The Volatile Stock Market?
Did you see the Super Bowl Sunday?
Of course you did. You and 103.4 million other people.
Unless you are a Patriots fan, it was a joy to watch the
Philadelphia Eagles defeat Tom Brady and the New England Patriots.
It was a good game. Very exciting. Unfortunately for the Patriots, they were just a little off.
You’ve probably noticed that it’s not only Tom Brady and the Patriots that have been having a tough time recently, the stock market’s been having a little trouble too.
19 Months of Low Volatility
On Monday February 5, the Dow Jones Industrial average dropped over 1,000 points. That was more than a 4% move to the downside.
It’s been a long time since we’ve felt anything like that.
In fact, the last time we had a pull back of more than 5% was back in June of 2016. Over 19 months ago. That is a remarkably long time to go with such unusually low volatility.
And it wasn’t just a period of low volatility. It was also a lengthy period of time where the market kept on reaching new high after new high.
In fact, there have been 11 new highs for Dow in 2018. Think about that, 11 new highs in less than 25 trading days.
But 2017 was even more incredible. There were an astounding 70 new highs in 2017.
Challenging Times Ahead
I think one thing we can all agree on is that volatility is back.
It’s quite likely that the easy ride upward we’ve been experiencing has come to an end.
But that’s okay.
Investing in the stock market is not supposed to be easy. It never has been.
Yes, there have always been unusual periods of time when the market seems to do nothing but go up. Just like we’ve seen in the last year or so.
But these easy and quiet times are inevitably followed by more difficult and emotionally challenging times.
The volatility we are feeling now is nothing new. In fact, this much more in line with the way the markets normally act.
In fact, J. P. Morgan, the famous banker and investor, once said that it is volatile times like these when “stocks return to their rightful owners.” That is not by coincidence.
Why You Shouldn't Be Worried
Don’t let this volatility get you down. Not only should it to be expected, there are plenty of reasons to be optimistic about the future.
One very important reason has to do with the recently passed Tax Cut and Jobs legislation.
Although many people and pundits have complained that the bill doesn’t go far enough to help the middle and lower classes, I think that misses the point. At least for those of us who own stocks.
This new law is good for corporations and as a result is good for us as investors.
The new law reduced the maximum corporate tax rate from 35 percent to 21 percent, it eliminated the corporate alternative minimum tax and it is likely to provide significant economic benefits to many corporations.
Because of these changes, it is expected that the U.S. will go from having one of the highest corporate tax burdens in the world to being in the middle of the pack.
The new tax changes will also move us toward a territorial tax system, taxing companies on profits earned in the U.S. It also provides incentives for companies to repatriate assets currently held overseas from prior years back to the United States.
Complaints about the tax bill seem to revolve around the idea that these benefits will not trickle down to the general public.
I share these concerns.
But I have no doubt that this bill will be good for U.S. corporations. Because of these tax law changes, U.S. corporations will be able to save money, buy back shares of their own stock and increase dividends.
The Bottom Line
All of these activities bode well for corporate profits, stock prices and the continued upward rise of the stock market.
So even though the volatility has returned, I think we should stay focused on what really matters.
- The underlying fundamentals of the stock market will remain in place
- Healthy markets require volatility. Volatility is necessary for a healthy and functioning stock market
Another thing to consider is your goals.
Although things have changed with the stock markets, I bet nothing has changed with your goals. And if that’s the case, it’s important to stick to your plan.
We’ve all heard the popular saying, there is no free lunch. It is in times like these, by sticking to our investment plan that we “earn” the good returns that the stock market provides.
In my next article I will expand on how to create an investment plan that could be appropriate for you and your family.