Admittedly, it’s awfully had to have perspective when you see as much red on Wall Street as we have seen this week.
The raw 1,175-point drop in the Dow Jones Industrial Average DJIA, -0.08% on Monday was the worst point-based decline in history, and the 4.6% decline was enough to wipe out all of January’s gains and then some.
But let’s all take a deep breath and relax. While volatility is never pleasant or easy to endure, it is certainly not universally a sign of dark things to come.
Personally, on Monday I was thinking about the big declines of August 2011 when the Dow logged 500-point declines on three days, each amounting to roughly a 5% drop, across about two weeks. The events were fueled by a contentious debt-ceiling debate in Washington, D.C., that ultimately resulted in a downgrade for America’s credit rating.
A lot of the notes were similar then in headlines — a fear that valuations had gotten ahead of themselves, that investors were in store for mayhem at the hands of the Federal Reserve and that dysfunctional budgeting processes in D.C. would wreak havoc on the U.S. economy.
But by August 2012, a year after the supposed mayhem, stocks were up 15% from their lows. The S&P 500 has rallied about 120% from August 201 until now. (#ThanksObama)
I’m not saying we have another 15% upside between here and January 2019. But it’s worth remembering that troubled short-term forecasts and big one-time declines don’t always add up to disaster.
So if you’re freaking out, take a deep breath and read these nine reasons why the stock market and the American economy aren’t at all on the verge of collapse:
This is not a “crash”: Investors would be forgiven if they interpret a big single-day drop in the markets as a crash, or that a few significant down days in a row means we are in store for another financial crisis. After all, we had more than a year without a drop of 5% or more before this recent bout of volatility.
But if you think you’re living through a crash, let’s recall 2008 when the S&P 500 SPX, -0.50% went from 1,300 in August to 800 or so by Thanksgiving — a 40% drop in roughly three months. Have a little perspective, people.
Read: Was that a stock-market crash? Do the math, and check the yield curve
Besides the last 10 days, stocks look great: Keep in mind that even with the recent declines, the S&P is up 7% in the last six months, 15% in the last 12 months, 30% in the last three years and 75% in the last five years. Yes, a big one-day drop is worth noting. But in literally period beyond the ultrashort term, the market appears to be moving steadily higher.
Corporate earnings are strong: Looking beyond the tale of the tape, it’s important to understand why stocks have been booming: because corporate earnings have been on an upswing. The tax cuts passed late last year will deliver bigger profits into the pockets of businesses, but that is on top of an already defined uptrend that included a roughly 10% increase in corporate profits across 2017 — the fastest pace since 2011, and yet another record. If you believe stock prices reflect the fundamentals of publicly traded businesses, then there’s reason to think the rally is justified and not in danger.
Read: The tax bill is making the fourth-quarter earnings season a muddle
Consumer metrics are great: And why shouldn’t earnings look great when the American consumer’s confidence remains near 17-year highs, and measures of actual expenses show consumer spending increased 0.4% in December for the biggest jump since 2011? Consumer spending represents about two-thirds of American GDP, and happy consumers mean a bright outlook for businesses and the stock market.
Housing still humming along: Part of the reason consumers remain confidence is the “wealth effect” from a rising housing market, with home values steadily moving higher. The latest proof: A 6.2% annualized increase in home values, as measured by the latest Case-Shiller index data. Some naysayers point to the fact that tight supply is supporting prices, but the alternative is a building glut and vacant bank-owned properties. On the whole, the housing market’s gains look secure and likely to continue.
U.S. labor market is superb: It’s not just the value of homes that matter, but also the jobs created by the industry. And just as housing’s resilience has resulted in strong hiring and wage trends, just about every other segment of the American workforce is doing well, too. The unemployment rate recently hit is the lowest in 17 years after years of steady improvement that began back in 2010 under President Obama. Wage growth also is looking strong, with January’s tally showing the biggest jump in worker pay since the recession.
Read: Workers are down $10 trillion, and the stock market is worried about a 9-cent an hour raise?
Global growth is looking up: In fact, it’s not just the U.S. looking strong. The global outlook is bright after 3.7% growth in 2017 and estimates of 3.9% growth for both 2018 and 2019 according to the International Monetary Fund’s World Economic Outlook released just weeks ago. The World Bank is similarly optimistic, increasing its forecast for 2018 recently thanks to a stronger-than-expected 2017 and high hopes for the current year.
Stocks are still your best bet: All this should provide encouragement that the stock market is on firm ground right now. But it’s also worth exploring what the alternatives are if you were to forgo stocks. Risky cyptocurrency “alternatives” like bitcoin BTCUSD, +4.41% are looking mighty shaky, and the seemingly lower-risk bond market is also in turmoil as the Federal Reserve looks to tighten policy and perhaps create headaches for bond investors. If you’re choosing a place to put your money, stock still look preferable to the field.
Read: Most cryptocurrencies are heading to zero, says Goldman analysts
Also: Winklevoss: If you can’t see bitcoin at $320,000, you just lack imagination
Investing is about patience: Most importantly, why are we even talking about whether this is a top and whether you should be timing the market? The best portfolio strategy is one where you take a diversified approach to long-term asset allocation, and stick to your plan regardless of the news cycle. If you continually let the crush of headlines scare you out of a disciplined approach to your portfolio, you will be never get ahead — in February, in 2018 or in any other time frame.