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The Calm Amid The Storms

If your social media feed is anything like mine, it looks like a large portion of the country is filled with anger, fear or some combination of the two.

Yet in the investment world the recent prevailing sentiment was, until recently, much more “Don’t Worry, Be Happy.” Conditions became so tranquil, in fact, that some variation of the question “Should We Fear The Stock Market’s Lack of Fear?” appeared in The Wall Street Journal, The Telegraph and USA Today, among other publications.

In other words, according to some observers, it was quiet – too quiet. But was such uneasiness justified?

The Chicago Board Options Exchange Volatility Index, better known as the VIX, hit its lowest level since 1993 in early May. (The VIX measures potential price fluctuations in the Standard & Poor’s 500 market, which makes it a frequent stand-in for measuring the stock market’s expectation of volatility in the short term.) But after new doubts were raised about President Trump’s recent actions and the possibility of impeachment, stocks declined and the VIX spiked by more than 65 percent. So were the worriers right? Or was this simply a pocket of turbulence in what will continue to be a smoother-than-average ride?

It is too soon to say whether this jump in volatility is a short-term blip or something more. But either way, it is worth stepping back and considering the long-term view of the current market situation.

U.S. corporate earnings are on track to reach the best quarterly pace in over five years, according to Thomson Reuters, and economic growth worldwide continues to rebound. The president, vice president and Congress all share the same pro-growth economic agenda. While global and geopolitical tensions continue to run high, no disheartening economic news has recently arrived to undermine investor confidence.

On the other hand, reasonable people evaluating the global economy do have things to worry about: the current presidential administration continues to face crisis after crisis, many of them self-inflicted; China’s economic measures may be weaker than the country’s government reports; and while anti-EU candidates have lost several important races (most recently in France), the populist movement is not necessarily down for the count.

There will always be things for us to worry about in the world. At the same time, there are reasons for real optimism among investors, business owners and other market participants. As always, investors should pay attention to valuations and look for opportunities to rebalance their portfolios when some investments significantly outperform others. At Palisades Hudson, we still believe that now is as good a time as any to put assets to work.

As James Glassman recently observed for Kiplinger, many investors remain leery of stocks after the 2008 recession, but this skepticism has helped prevent stocks from becoming overpriced. And while our current market upswing is the third-longest expansion since 1854 according to the National Bureau of Economic Research, no one can accurately predict when a downswing will arrive or how severe it will be. Instead of trying to guess, smart investors will continue to pursue a diversified strategy that fits their individual risk tolerance. As is the case in any market environment, an overly conservative strategy risks lagging inflation, so it is rarely if ever appropriate to pull out of the stock market completely.

As Larry Elkin observed in this space a few years ago, sometimes a beautiful day is the “calm before the storm,” and sometimes it is just a beautiful day. Yes, things will inevitably turn south sooner or later. History teaches us that every bull market eventually ends. Some prognosticators may point to this as the moment when investors should sell. But there have been loud voices predicting market crashes since the beginning of the current economic recovery, and they have all been wrong so far. We never recommend attempting to time the market, and neither a stretch of very low volatility nor a temporary spike changes that recommendation.

Just because something goes up does not mean that it must immediately come back down. The history of the U.S. stock market has been one of continuous long-term growth, with plenty of ups and downs along the way. Even if social media has you on high alert, investors will benefit over the long run by staying disciplined and avoiding emotional decisions.

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