The bluster that accompanied Trump’s election largely materialized. Stock markets rallied ahead of his inauguration as president, and bullish sentiment lasted throughout the first year of his presidency. Then something unexpected happened. Markets started reversing. Precisely why this occurred is up for debate, suffice it to say that corrections are a normal and healthy part of market movements.
The Dow Jones, NASDAQ, and S&P 500 index have all retreated from multiyear highs in 2018. The NASDAQ is half way between its 50-day moving average of 7,233 and it’s 200-day moving average of 6,761. Much the same is true of the Dow Jones and the S&P 500 index. The bigger question is why markets have retreated from their multi-year highs?
Market Corrections Bring Value Investors Back
One of the fundamental realities of market activity is the following: Slumping equities prices create opportunities for buying on the dip. Provided the fundamentals of the economy are sound, there is no reason to believe that value-driven investors will not take to the markets. There is significant evidence to suggest that the fundamentals of the US economy are stable. Consider the following:
- The effective tax rate for individuals and corporations has been revised lower. This is one of the most significant achievements of the Trump presidency, and it will have long-lasting ramifications for the broader economy. Lower taxes mean that people and businesses have more personal disposable income with which to do whatever they like. The money can be invested, used to raise wages and salaries, buy goods and services, and help the domestic economy to prosper. Lower taxes also boost economic growth prospects. Equities markets will rise on the back of lower taxes.
- The unemployment rate in the US is fixed at 4.1%. This figure has been locked in place since October 2017 and is a good sign for economic growth projections. With the economy operating at full employment capacity, there is little slack and everything to gain. Provided wages grow at a healthy rate and do not spur an inflationary effect, the benefits will be widespread.
- The federal funds rate (FFR) is hovering around 1.50% – 1.75%. This is part of a broader trend of rising interest rates. The current cycle of quantitative tightening is reflective of an improvement in the macro economy. As interest rates rise, the cost of money becomes more expensive. This filters through the economy in the form of higher interest-related repayments on mortgages, credit cards, personal loans, and business loans. Listed companies are subject to these loans and this has a contractionary effect on stock prices.
Investors may be a little concerned about which way the markets are moving. Olsson Capital trading analyst, Blythe Paddington recently shared his insights on the matter:
“What we are seeing taking place in the markets now is nothing new. The cryptocurrency boom came and went, and it may well resurface and take us all by surprise. Established trading and investing institutions like the Dow Jones, the NASDAQ, and the S&P 500 are behaving as they always do. There is nothing different about what we are seeing in the financial markets today. We may be coming to the end of the golden bull run, but that’s merely a short-term phenomenon.
Over the long-term, there is always more to be gained from dabbling in the stock markets. Over the short-term, there are many contrarian investment options available such as gold as opposed to stocks, safe-haven currencies like the JPY, CFD trading on stocks, commodities, indices and currency pairs, and futures markets. If an asset is falling, we can hedge against that with CFDs. There is always money to be made in the financial markets!”
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