Is This Normal?
The current market correction and talk of tariffs
Written by: Steven Higgins, Financial Advisor, Principal & Allison Schmidt, Financial Advisor, CFP®, CPA
As the first quarter of 2018 draws to a close, investors are no doubt left nauseous. January saw the stock markets race to an unsustainable gain of more than 5%. In February, the markets had to digest stronger than expected inflation numbers resulting from the strengthening economy. In March, stock markets nearly clawed back the entire 10% sell off only to be caught off guard by the seemingly surprise notion of tariffs being imposed on steel and other goods coming in to America. They key element impacting the market is “shock.” Markets react negatively to “information shock” like the sudden mention of tariffs. When information is thrust into the news cycle unexpectedly, investors have to quickly reconstitute strategies to reflect the new information. So, this market volatility we are seeing is, in the context of surprise news like “tariffs” expected and yes, normal.
Market corrections are stock market drops of at least 10% from a market high and are common place, but that does not make them any more fun. Over the last two decades the S&P 500, a widely held index of large American companies, has seen 10 bull market corrections. While there have been significantly more 10% drops in the market, many came after the market was already in a technical correction. The average correction was 22.33% and took 216 days to fully recover and reach a new market high. Interestingly, the S&P 500 has notched an average annual return of 14.9% since the beginning of each correction. Relative to the average correction, this current correction is a baby. The correction is just 59 days old and if the low holds at 10.2%, will be the most shallow correction ever. So, is this correction “normal?” Absolutely. Is this correction “bad?” It absolutely isn’t right now. Investors often times try to convince themselves that “this time is different” in order to rationalize some fear or anxiety they have about the markets or their own financial situation. It is okay to be anxious. Your investments and your financial strategies are important to you and that’s a good thing. Our clients have portfolios that are built with the understanding that market volatility is common place. We do not try and time the market, we prepare well in advance.
So, what’s with all of this tariff talk? Simply, tariffs are taxes on imports. There are some in the Trump administration that feel the imbalance of trade, called the trade deficit, is not in the best interest of America. China, widely known as the chief culprit of trade manipulation, is in the cross hairs of the trade deficit hawks. It is true, China is abusive when it comes to trade practices. However, many investors and economists believe that while we may lose a few trade “battles” with China, there has been an overall advantage for the United States when it comes to globalization and free trade. The chart shows the growth of the U.S. Economy and the S&P 500 total returns since the implementation
of the free trade hall mark deal, The North American Free Trade Agreement (NAFTA) in 1994. President Reagan first rallied support for NAFTA during the election for his second term. President Bush then negotiated key terms of the deal and finally President Clinton fast tracked the bipartisan deal’s completion and signing.
The current tariffs that the Trump Administration is imposing should not be considered enough to bludgeon the current growth and strength of
the American economy. Generally, tariffs and trade wars are not considered good for stocks. However, the President’s current proposed trade polices do not amount to a sweeping change or retreat to protectionism. The reason stocks have reacted negatively to the news of the tariffs is that the prospect of a change to policies that have correlated positively with substantial growth and prosperity in the U.S. over the last 25 years is something investors are taking with trepidation. Especially as the surprise news came while the market was still a bit wobbly following the news in late January of an unexpected uptick in inflation.
Next week will welcome the beginning of the second quarter of 2018 and maybe a “Spring” of sorts is exactly what we need. The economy is strong, we have a lot of positive economic news, and this stock market correction is absolutely normal. It’s time to go outside folks!
*All sourced from bloomberg.com
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through HD Wealth Strategies, a registered investment advisor and separate entity from LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
