Headlines - September 16, 2019

Over the medium and longer term, the fundamentals are the key drivers of stock prices. These drivers include economic growth, corporate profits, interest rates and bond yields, and the level of inflation.

Shorter term, several factors can influence sentiment and trading. In May, a rise in trade tensions created modest barriers—headlines. The Fed shifted its posture in June, lifting shares.

Then, as August began, stocks barreled into new headlines as trade tensions with China took center stage, and tit-for-tat retaliatory measures sullied sentiment.

As we roll through September, the bulls have regained their footing. The primary reason–headlines. This time, tensions have receded, and with it, bond yields have stabilized.

While negative or positive headlines influence day-to-day trading, the economic data aren’t suggesting that economic growth is about to stall, or worse, slip into a recession.

This point can’t be under emphasized as a factor that lends support to shares.

While we didn’t finish the week at a new high, the S&P 500 Index closed within 0.6% of its late July peak (MarketWatch data).

When volatility isn’t really volatility

When we witness an 800 or 900 point drop in the Dow Jones Industrials, it captures our attention. Yet, on a percentage basis, it wouldn’t rank as one of the top market declines.

So, let’s view volatility from a broader perspective. Has it really been that volatile this year? The graphic below illustrates that since 1980, the average maximum drawdown of the S&P 500 Index has been nearly 14%. Through September, the maximum peak-to-trough decline: 6.8%.

We’ve experienced day-to-day volatility this year, but so far 2019’s largest peak-to-trough decline has been modest, or about half the average since 1980.

More importantly, the average annual increase since 1980 has been 12.6%. It highlights the long-term upward bias in stocks. Successful long-term investors recognize that day-to-day volatility is unavoidable, but they avoid rash decisions when volatility strikes.