June 2012. December 2012. June 2013. October 2013. January 2014. Each timeframe representative of a period during which the Volatility Index (VIX), also known as the fear gauge, reached levels of roughly 20 or more. Each date was accompanied by negative headlines. Pessimism. Prognostications of large market pullbacks. Doom. And gloom.
Each also represented a great time to buy stocks. Because each was proceeded by yet another stock market run up. Higher highs. Higher lows. Trending upward and to the right.
Fact is, had you sold stocks each time the VIX fell beneath 13 (markets were calm and tranquil), and purchased stocks each time the VIX ascended above 20 (negative news, pessimistic malaise), you would have returned a king's ransom these last two years.
Not that we're recommending such regular trading. But, the point is, this is a bull market. So long as the market continues achieving higher highs and higher lows, it will remain a bull market. Each move higher beats the previous move higher. Each drop does not fall as far as the previous drop. The occasional five to 10 percent correction, and the caterwauling that accompanies it, are as omnipresent as greed and fear.
Corrections are healthy. Natural. And have little to no impact on the powerful trends already in place. Remember:
-Interest rates remain extremely low.
-Investors remain skeptical - market tops are accompanied by investor euphoria.
-Stocks are not expensive, trading as roughly 15 times next year's earnings.
-Prior to this pullback, the stock market just achieved another record high.
This is a bull market. And a bull market it remains. Regardless of the temporary, weekly machinations. Keep the big picture in mind.
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The Good
Rail traffic and auto sales are strong. ISM manufacturing and service reports showed expansion.
The Bad
China's economic growth is slowing. The tenuous aspect to this story remains the political ramifications. Can the Chinese Central Committee maintain control of a large population migrating to the nation's urban corridors in search of opportunity when the opportunities are becoming more scarce? The real irony? After a decade of dynamic growth, China risks becoming a victim of its own success.
Some of the U.S. economic data was soft. Including reports on manufacturing activity and the trade deficit. Accordingly, the Citigroup Economic Surprise Index, which measures the data against analyst expectations, saw a decline.
We're faced with the most disappointing macroeconomic period since 2012. Amid the continuation of the Fed's QE3 tapering. And the inevitability of the first short-term rate hike. All of which adds up to something from a Nouriel Roubini fever dream. Ominous, but fleeting. Hopefully...
The Ugly
As flare-ups continue across America's traditional sphere of influence, U.S. foreign affairs have reached a crossroads.
Secretary of State John Kerry abruptly cancelled his Middle East shuttle diplomacy last week, all but abandoning any hope for progress out of the current impasse.
In Ukraine, Russian troops have sealed of Crimea. Russian sympathizers have attacked Ukrainian state buildings. And Ukrainian nationalists have stormed the Supreme Court in Kiev.
In the Korean peninsula, the North and South are lobbing missiles into the sea like children with water balloons. As tensions mount, the possibility for unseen risk and error increases.
The Bottom Line
The economic data continues gathering steam. Q1 earnings expectations have been guided down on weather-related concerns, making earnings beats more probable.
With inflation in check and the Fed's accommodative posture, we believe that this market has room to run. A near-term pullback, be it this week or in the months to come, would be welcome and healthy.
Big waves often find the coastline. Tsunamis rarely do. Keep your eye on the big picture and remain focused on your objectives.
Weekly Results
Major markets finished mixed last week. The DJIA rose 0.55%, the S&P 500 gained 0.40%, and the Nasdaq dropped 0.67%. Small cap stocks rose 0.14%. And the 10-year Treasury bond yield was unchanged at 2.72%. Gold rose $8.37 per ounce, or 0.65%.
