Six months into the year, the stock market (as measured by the S&P 500 Index) is slightly above where it began the year. Officially, the market is up 1.7% as of June 30, 2018. If you were sleeping or just don’t pay attention to the daily market minutia (which we highly recommend), you definitely missed the ride (so good for you)!
Before we even watched the Super Bowl, the stock market raced out to a 7.5% gain only to retreat into negative territory (down 3.5%) right after the Big Game. This up and down price movement continued throughout the first quarter only to relent to a more gradual rise in quarter two landing us at the positive 1.7% return to end the first half of 2018. In summary, volatility has returned, and we could not be any more excited!
As value driven, long-term investors we welcome volatility with open arms as it provides for more investment opportunities. Naturally, when there is a level of hysteria amongst market participants, there is no doubt some stocks suffer unwarranted short-term price declines. Needless to say, this provides the opportunity for us long-term investors to make investments on the cheap! We definitely like seeing the stock market rise, but a few blips here and there is truly beneficial!
Throughout the past six months, we asked ourselves two questions: 1) What is driving the newfound (and appreciated) volatility and 2) Will it have a long-term impact on our investments? Simply, this volatility is the result of political and economic initiatives (i.e., Changes from the status quo).
On the political front, right or wrong, President Trump is definitely trying to get things done. As it relates to business and subsequently the stock market, his tariffs and tax cuts have gotten the market’s attention, creating uncertainty and thus a more volatile market. As we’ve stated in the past, the typical investor (both professional and individual) do not like change and uncertainty!
On the economic front, the Federal Reserve has begun raising rates. This, by itself, typically moves the market in one direction or another. Throw in the somewhat unknown impact of President Trump’s initiatives and short-sighted investors are concerned. The Federal Reserve does have a herculean task of getting this right (i.e., tighten rates just enough to keep the economy from overheating but also not tighten too much sending us into a recession). Maybe that’s why they get paid the big bucks (or not)!
In summary, these past six months have seen a lot of activity and some things that are clearly negative for businesses. So, why then is the market still above water? Clearly, the economy is in very good shape as even proposed tariffs and higher interest rates have not totally derailed it. As we move into the second half of the year we expect more noise, especially from the Capitol. We will buckle up for the ride, digest what comes out of Washington and control what we can control… investing in quality companies at our price. Discipline and patience typically win out over the long-term!