What a stark contrast 2018 has been compared to the impervious market investors enjoyed last year. No matter the news or how high valuations seemed in 2017, markets found a way to move ahead. Frankly, at one point, it seemed stock markets forgot risk existed and events mattered.
Today, sentiment has shifted, events matter again and risks are seemingly everywhere, but that isn’t what this note is about. There are already plenty of media sources that are happy to explain how this, that or the other, will knock the economy into the economic abyss. Rather, we’ll focus on economic indicators that, for some, may provide reason for cautious optimism.
Economic indicators take many forms, but our focus is on those considered leading. Leading economic indicators are factors that are thought to provide early signals of turning points in the economy. An often-used comparison is that leading indicators are like looking through the windshield of a car, rather than its rearview mirror.
One widely followed composite of leading economic indicators is published by The Conference Board and includes factors such as initial unemployment claims, manufacturing new orders and stock prices. Below, we’ve summarized the data into two charts, January 2017 to current (left) and January 2006 to December 2007, the start of the last recession (right).
One important takeaway, as it relates to the charts above, is the slope of the two lines – the 2006 chart (right) displays the slow deterioration of the composite leading into the start of the last recession, while the current composite (left) continues to slope upward. Although this upward trend doesn’t guarantee we won’t enter a recession at some point over the coming years, it does, for some, suggest it is somewhat less likely that a recession is imminent and the current expansion has turned.
Our investment department continues to monitor many factors, such as leading indicators. Over the past few years, we’ve continued to communicate the importance of diversified investing. For investors that have taken this approach, it can make market swings, like those experienced over the past week, easier to endure.
Update 12/21
In our last e-mail on December 11th, we noted how certain economic indicators provided at least some reason for optimism in spite of the cloudy headlines. Roughly two weeks later, volatility has continued, but we believe not much has changed. While news media loves to blame something, or someone, for every market gyration, our function is different- provide objective perspective and help you achieve your long-term goals.
This is something we not only do when times are trying and investing is painful but also when markets are euphoric and taking additional risk seems so appealing. In many of our newsletters, we preach about the importance of diversified investing.
In short, diversification is designed to be an all-weather approach to investing. A long-term investing approach rather than short-term trading strategy. While it helps manage risk, it doesn’t protect against loss. Rather, it allows investors to remain invested during varying market conditions while minimizing extremes. Essentially, it helps keep investors from making emotional decisions around short-term events.
Market volatility can certainly trigger many emotions. This is understandable when you consider investors are used to seeing annual stock market gains 70% of the time. When losses do occur, it’s normal to fear the worst, and worry about extreme outcomes such as a 2008. We outlined some reasons why we don’t believe that to be the case in our last e-mail. Recently, we experienced similar volatility from May 2015 through February 2016 with headlines that seemed as equally gloomy as today. For many, it may be hard to recall that time period because markets recovered and sentiment improved.
As we come to the end of the holiday season be sure to enjoy time with family and friends. If you have any questions, or would like to talk more in-depth, please let us know.
