After experiencing one of the worst 10 week declines this decade, markets have followed up with one of the best two months to start a year in history. Yet another example of why marker timers have been crushed so many times since 2008. The average investor is better off neverlistening to market headlines and traditional news outlets. There are always a few touted "geniuses" who call a certain market correction but over the long run a majority of these market prognosticators are wrong far more often than right. I'm not picking on them as they are being paid to make predictions. No wants to write a story about investment managers who don't take wild guesses as to the next downturn.
I will be the first to acknowledge that the global economy is facing several headwinds and the economic data isn't getting any better. In early January we received earnings warnings ranging from Apple, Intel, Constellation Brands & FedEx to name a few. But investors who sold because of this have watched stock markets rallyfor six consecutive weeks. And volatility has all but ceased for the time being. Sometimes the only thing that makes sense about markets is the fact that they don't always make sense.
How could markets rally nearly double digits on the back of weaker earnings? Some are calling this quarter an "earnings recession" yet the market keeps climbing. The fact is this is not uncommon. Surprisingly, since the 1930s a majority of times when earnings were down, stocks actually ended the year higher. This is a head scratcher for many but the truth is the markets and the economy don't always go hand in hand. Markets are shaped by many variables and corporate earnings growth is just one. Data points such as inflation, wages and interest rates play an important role along with politics and central bank intervention. Relying on one as the basis of an investment decision is a fool's game. History seems to back this up.As Ben Carlson points out in his great piece, the 1930s saw earnings growth of -42% while the S&P 500 was nearly flat. The 1950s saw modest earnings growth of 46% but gains in the S&P 500 of nearly 500%! In fact, in 2018 earnings rose by 19.2% yetthe S&P 500 FELLby 4.4%.
Trade wars, rising interest rates and a looming government shut down spooked many investors and triggered a massive sell off. Two months later, the sell off has almost been wiped out as the Federal Reserve backed down from their interest rate hike projections of threeor fourrate hikes in 2019 to one or zero! This along with what appears to be some progress in the U.S./China trade talks sparked a breathtaking rally.
Too often investors want to find a silver lining for the basis of why they believe markets should react a certain way when in reality no one knows with any certainty. Investing isn't easy and when emotions get involved, it becomes even more difficult. Market corrections, bear markets andcrashes are what makes markets work. Without risk of going down there would be no chance of markets going up. While never enjoyable, an investor should accept the fact that over their lifetime they will experience multiple of these and the key is being in a risk adjusted portfolio that will allow you to sleep at night and avoid the cardinal mistakes of selling out of a plan that is working.