Updated Perspective on Markets

Another sharp drop happened on Thursday, similar to last Monday’s (Feb. 5) decline. Our conclusion remains the same, as stated in our February 6 memo – “Perspective on Markets”. Our view is that this is an overdue valuation correction, which we do not expect to escalate into an all-out meltdown or crash.

We thought it might be helpful to include a chart for perspective purposes, to perhaps better illustrate our commentary. This chart shows the most significant short-term corrections of the past five years.

We note that each of the latest two, occurred in 2015 – early 2016 during very sluggish, late cycle economic weakness. In each case, there was a rising fear of an upcoming recession. When that fear dissipated, so too did the corrections.

The chart also notes that the current correction comes on the heels of a very sharp January 2018 upturn. While very dramatic, the decline only takes the general market back to where it was in October/November of 2017. The 2018 year-to-date decline stands at about 3%.

Last, it is appropriate to note, as we have discussed in past years, that during periods of excessive optimism or fear, prices can diverge significantly from their rationally derived intrinsic values.  Leveraged derivative instrument programs, automatic “robot” type trading overlays, hyper speed formula trading (flash trading) are among a multitude of short term buyers and sellers that do not represent long-term investing flows. Said simply, these market structure anomalies, as they have in the past continue to contribute to excessive, short-term trading volatility.

Our conclusion is that the economic fundamentals are improving, market structure notwithstanding. We reiterate our belief that we are experiencing a correction, not a crash.