At the time of writing, the S&P500, Nasdaq, and MSCI World have all experienced significant declines from their recent highs. This has led to widespread worry among investors, who fear that the market will continue to decline. However, at Interlaken Advisors, we believe that this market correction is actually bullish for stocks, as Sir John Templeton once famously said, "Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria." By closely monitoring investor sentiment, we are able to forecast market conditions.
Despite a number of headline anxieties that are currently plaguing investors, we remain optimistic about the future of the market. One concern is the drop in oil prices, which has led many to fear a global recession. However, we believe that the total world consumption matches total production, which makes it unlikely that there will be a massive stock build of crude. Furthermore, the US is a net importer of oil, which means that cheaper oil prices are actually a tailwind for US GDP and companies. We can look to the oil-price decline from 2014 to 2016, which also worried investors at the time, but ultimately did not cause a global recession.
Another anxiety is China's bear market and slowing GDP growth, which some investors worry will infect the rest of the world as it sinks. However, we believe that the tariffs from the Trump administration amount to less than .3% of global GDP, and China has been in and out of bear markets for decades. Their economy is shifting from supply and production to services based, which means that their GDP has been shrinking for years. We believe that these worries have been priced into current analyst predictions.
Investors also worry about the Federal Reserve's continued rate hikes, which have occurred eight times since 2015. However, we believe that rate hikes only become problematic when they invert the yield curve, which is not currently the case. We do not see the current rate hikes or the next predicted rate hike in December as problematic for the market.
Finally, there is the political divide between the two parties in Congress, reducing the chances for any major legislation to pass through. However, we believe that the market likes gridlock and that this is nothing new for America. Despite the headlines of subpoenas and possible indictments, we have seen two presidents impeached by the House of Representatives in the past, neither of which passed through the Senate. During the Clinton impeachment, the stock market initially fell, but eventually created all-time highs. During Nixon's resignation, which occurred before impeachment was possible, stocks fell hard due to high oil prices and inflation.
While the current correction may be uncomfortable, we remind investors that corrections can occur with or without reason, and attempting to time the market in the short term to avoid swings typically hurts portfolios more than helping. We believe that the bull market should resume soon, as bear markets generally stem from large, unseen negatives that cut trillions from global GDP, rather than from known cynical narratives that are already priced into current expectations. The LEI continued to expand in October, despite the stock sell-off, and GDP continues to grow, the yield curve remains normal, and inflation remains relatively low.
Nothing herein is intended to be investment advice. Investment in the stock market involves risk of loss. Past performance is no guarantee of future returns. The content contained in this article represents only the opinions and viewpoints of the Interlaken Advisors editorial staff.
