After 2008, plenty of pundits and prognosticators began to speculate whether the ultra-low inflation and near-zero interest rates at that time somehow represented a “new normal,” a change to the fundamentals of the economy. With the long-expected rise in interest rates, the return of modest inflation, and continued economic growth, it appears the economy may be on the road to returning to the “old normal” those pundits may have forgotten about during the recovery.
Similarly, investors likely remember the near lack of volatility in equities throughout 2017, with many “experts” seizing upon that lack of volatility as evidence of a “new normal” in the equity markets. But in previous commentaries, we’ve explored how the almost eerie calm of 2017 was the outlier and did not represent a “new normal.”
The absence of volatility in 2017 may have lulled some investors and pundits perhaps into a false sense of security about market behavior. In the first quarter of 2019, the S&P 500 has experienced 28 days of returns falling or rising by at least 1 percent. In 2017, the S&P 500 experienced only eight such days all year. That’s atypical.
Returns outpacing expectations
The good news? Despite the volatility, returns have outpaced expectations so far this year. The S&P 500 has been positive for the year so far, and bonds — while not reaching the stellar returns of equities — have also provided positive returns to portfolios.
The concerns heard about “cracks in the economy” that many pundits spoke of over the last few months seem to have evaporated; instead, most portfolio managers today are expressing belief that the economy still has room to grow, citing as evidence March’s 3.8 percent unemployment rate, 196k jobs added to the economy in March, rebounding retail sales and a high level of consumer confidence.
Even foreign stock markets have been mostly positive, although they have struggled to recover as much as domestic markets. The German economy — recognized by many as the driving force of the European economy — has shown signs of slowing down as the manufacturing sector has struggled.
There’s no denying that the Fourth Quarter of 2018 was rough, pulling back nearly 20 percent from market highs reached in September 2018. But after that pullback, the market has experienced a strong recovery. Corporate earnings have been good, with earnings growth forecast in the 10-12 percent range for 2019. Geopolitical issues like the lingering saga of Brexit and the possibility of trade and tariff conflicts with China leave the markets with no clear sense of direction in the short term.
Seeking clarity, direction
No one has a crystal ball, and no one knows where the markets will be going over the short-term. As the markets gain clarity on some of the geopolitical issues creating uncertainty, economies will continue to grow, and companies adapt to their environment. This process can create volatility in the short term.
But in the end, whether it’s a “new normal” or an old one, Regency’s message remains the same: The key is to be in a diversified portfolio where you’re comfortable with the volatility, and remain focused on the long term.
Whether it’s a bumpy road or a roller coaster ride, those ups and downs of volatility tend to even out in the long term. If you’re in a diversified portfolio and comfortable with the volatility, the key may be to hang tight and just enjoy the ride.
FOCUS 360 Disclosure
Past performance is not indicative of future results, and inherent in any investment in the market is a possibility of loss. There are inherent limitations in making assumptions due to the cyclical nature of the market.