Although market volatility has returned over the past few months, it's important to cut through the media buzz and make rational decisions based on fundamentals. While it may be true that the market is no longer as docile as it was last year, low volatility is historically unusual. In 2017 there were no trading days where the market changed more than +/- 2%. This current environment is more representative of how the market has behaved over longer periods of time. Furthermore, despite various geopolitical tensions as well as concerns over tariffs and trade, the underlying economic indicators for the US are strong. Job creation has continued to be positive, housing construction numbers are up, and The Conference Board Leading Economic Index (LEI) continues to improve. With all of that said, investing during volatile periods can still be very intimidating.
In my opinion, we are entering a new period where the Federal Reserve will continue to raise rates and geopolitical events will continue to be in the spot light. This will create more uncertainty and more volatility. In these times an active management strategy can offer opportunity as active managers seek to benefit from the mispricing of securities as markets are whipped up and down. Over the last several years passive investments have been in the spot light. After the financial crisis investors saw their portfolios decline significantly and perhaps felt paying higher fees for active management simply wasn't worth it. Flows into passive investments have outpaced active investments over the last several years as investors sought value. Accommodative Federal Reserve policy and attractive valuations after the crisis have helped fuel the market recovery, like the tide rolling back in raising all boats.
Currently almost every sector of the US equity market is trading well above average valuations, Federal Reserve policy has changed direction, and we've seen a push back against globalization. The UK's Brexit vote and the election of President Trump have all resulted from a growing segment of the population that feel that they have been left out and are no longer represented. In other countries, we have seen elections where the incumbents have also been ousted all the result of people not happy with the effects of a global world. With that said, globalization is not going to stop but it may take a breather for a little bit as we see what new leadership and ideas produce. My thoughts…make sound fundamental investment decisions and consider investing in a pair of Beats headphones to keep the noise out!
Wayne L. Locke, CFP® Matson Financial Advisors, Inc.
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