Thoughts On Another Plunge

February 9, 2018

While we had a nice reprieve on Tuesday and a more-or-less non-eventful conclusion to Wednesday’s trading, stocks headed south again on Thursday, with the 4%+ losses on the Dow hitting quadruple digits for the second time this week. The S&P 500 fell “only” 3.75%, with the latest setback pushing the drop from the highs set less than two weeks ago to more than 10%. Such an event is defined as a correction…

…which are hardly unusual events in the annals of the equity markets, though we respect that the magnitude of the single-day declines we have been seeing is not exactly ordinary.

Of course, market history shows that 10% corrections take place every 10 to 11 months, with the good news being that they often do not last very long, 102 market days, on average.

That does not mean that the worst is over as we suspect there are still plenty of levered investors with positions to unwind that could roil the markets. Happily, that does not include any of our newsletter portfolios at present, though that situation could change if the downturn continues. Still, we never forget Warren Buffett’s admonition, “When the tide goes out you see who has been swimming naked,” so any margin that we might use would be very judicious.

The reason that we remain so sanguine about the prospects for stocks is that the supposed causes of the plunge, namely fears of rising interest rates and inflation, are very much overdone in our view. After all, interest rates have been climbing on the back of healthier economic data, with New York Fed President William Dudley stating on Thursday afternoon, “There are so many things now on the side of the economy being stronger than expected that I think [a slowdown] is not that likely. We have above-trend growth, we have buoyant financial conditions, we still have an easy monetary policy, and this is all taking place with a very large tax cut that is going to provide additional stimulus.”

Mr. Dudley concluded, “The little decline that we’ve had in the equity market today has virtually no implications for the economic outlook,” and we remain of the mind that a healthy business climate is likely to lead to improved corporate profits, which is ultimately what drives stock prices.

Of course, we also like that stronger earnings, thanks to a better economy AND corporate tax cuts, allow Corporate America to buy back more stock (at lower prices today!) and boost dividend payouts.

And, we are not convinced that the latest spike in wage growth, which arguably triggered the current correction, is anything other than corporations sharing some of the tax-cut wealth with their employees, versus a sign that rampant inflation is about to rear its ugly head.

Not to minimize the recent ugliness, but we have endured far worse in our 40 years of publishing The Prudent Speculator newsletter and we have no reason to change our belief that the secret to success in stocks is not to get scared out of them.


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