Mid Week Notes - December 26, 2018
Stocks Cap Worst Week Since 2008
That was the lead headline in Saturday’s Wall Street Journal. Comparisons to the financial crisis are worrisome. But are economic conditions similar today?
Then vs now
|Subprime loan crisis||Bond or junk bond bubble?|
|Credit markets were freezing up, sharply wider spreads||Junk bond spreads over comparable Treasuries have widened, but otherwise, credit markets are functioning normally|
|Economy in freefall||Economy slowing but expanding; leading economic indicators suggest further growth|
|Lehman collapses, bank failures, Federal takeover of Fannie, Freddie, and AIG||Bank capital positions are much stronger|
|Employment falling sharply||Employment is growing; weekly jobless claims remain near historically low levels|
|Corporate profits falling sharply||Corporate profits forecast to rise in 2019|
|Overbuilding creates housing bubble; housing activity/prices in steep decline||Housing activity has stalled; stronger lending standards in place reduce large foreclosure risk|
|Retail sales in decline; consumer confidence in sharp decline||Retail sales are rising, auto sales have slowed; consumer confidence strong|
|China tariff worries abound|
Source: Wall Street Journal, Bureau of Labor Statistics, U.S. Commerce Dept, Bloomberg, and various other sources
Conditions are far different today than in 2008.
While recent stock declines do not correlate with current US economic fundamentals, seasoned investors recognize that stocks aren’t immune to unexpected selloffs. Since WWII, the S&P 5001 has averaged a 31% drop every 5 years (LPL). But, over the same period, the same index has been up 79% of the time (total annual return – NY University Stern School of Business).
The data do not lie. Long term, stocks have had an upward bias. A well-thought out financial plan incorporates this evidenced-based approach.