Until October 2018, the reality that markets go up and markets go down seemed be lost on many market participants as stocks have generally trended up for over 9 years, longer than many current investment managers have been in the work force.  Investment management has many meanings these days.  Much portfolio management (aka “trading”) is computer-driven. algorithmic trading and an ever-increasing portion of stocks are held in passive index funds and ETFs.  Last, but hopefully not least, are managers who focus on company fundamentals and plan to be long-term shareholders.  While the people behind the algorithmic trading insist that their huge volume of trading adds liquidity to the markets, many successful, long-term investors have lamented that this trading exacerbates volatility as they pile into and out of stocks depending on where the momentum is heading.  Whatever the case, the recent selloff reminds us that the pendulum always swings further than it rationally should, creating fear and opportunity when markets crater and greed and danger on when they go parabolic.  Divergences of security prices from company and economic fundamentals and the resulting emotions afflict everyone in the markets, but if you have a long-term investment horizon and can keep your fear and greed in check, you can ride out the short-term swings and end up meeting your long-term investment goals.

Fortunately, my readers are all long-term investors and market volatility bounces off us because we smartly ignore all the noise!  While even good news was bad news during December, for the most part bad news has been shrugged off (with certain exceptions) and moderate to good news rewarded for companies that have reported earnings in January for the quarter ended December 31st.  Modest earnings by Citigroup was met with an 8% rally over the two trading days after their earnings announcement and a good quarter from Facebook resulted in a nearly 11% gain the following day, even while the company remains under scrutiny for privacy issues and lack of oversight of website content.  Facebook was up 27% in January which translates into an increase in value, i.e., market capitalization, of over $100 billion.  This follows six months where the company lost over $275 billion in value.  Did the company’s prospects really change that much in half a year?  After a brutal fourth quarter 2018 stock market, investors decided that enough was enough and that overly pessimistic outlooks were already factored into many stocks’ depressed prices.

While January saw a nearly uninterrupted rally, there are still many economic and geopolitical issues that can affect the mood of the market.  While a lot of the blame for last quarter’s market drop was placed on Federal Reserve Chair Powell’s poor communication (or more likely holding to his convictions too tightly), the U.S. vs China trade tiff started showing up in higher material costs (tariffs) and reduced revenue from foreign sales by American companies, highlighted in December by Apple Inc.’s projected shortfall in iPhone sales attributed quite specifically to China.  Lastly, it is likely that tax-loss selling and hedge fund liquidations due to investor redemptions in December contributed to the severity of the drop.

President Trump, who eyes stock market levels as a key barometer of the success of his economic and tax policies, had repeatedly Tweeted about progress in trade talks.  Unfortunately, during the sell-off the initial euphoria of such Tweets was short-lived.  Similar Tweets during January have been met much more enthusiastically as has Powell’s newfound “patience” in determining the course of interest rates.  The point is, traders will still try to figure how the market will react to the next Tweet and market strategists will still estimate where the stock market will be in 3, 6 or 12 months.  Timing the market has been proven time and again to be a fool’s errand and for every one of your Facebook friends who makes an unsubstantiated claim that he sold all his stock holdings in September and bought back in on Christmas Eve, you have multiple friends who panicked out in late December and weren’t so proud to post on their feed.

As Warren Buffett has said, “It’s never paid to bet against America.  We come through things, but it’s not always a smooth ride.”  If you develop an intelligent investment plan, periodically review and adapt it to life’s changes and economic reality, then you can stay focused on the destination.