The Bull Market Drama Continues

Markets have been rather bumpy lately, and some folks are starting to wonder whether a bigger, potentially longer-lived pullback is in the offing. Short-term volatility is always impossible to predict or time with any certainty—no one we’re aware of has a provable history of repeatedly and successfully calling either pullbacks or bigger corrections—but in our view, recent wobbles are most likely typical bull market volatility, not the start of a big and scary downhill trend. This bull market has room to run.

Market volatility is a normal feature of bull markets. Even when fundamentals are strongest, stocks don’t move in a straight line. Ghost stories, like the Fed’s potential quantitative easing wind-down, can give investors the willies, and that fear can trump fundamentals—at least for a short while. Simply, as Benjamin Graham once famously said, “In the short run, markets behave like voting machines, but in the long term they act like weighing machines.” A voting machine measures sentiment (effectively, popularity) while weight is a measurable fundamental fact. Sentiment and emotions, like markets, are volatile.

Sometimes these moves are triggered by surprise news announcements or less-than-stellar data points, and sometimes they’re not obviously tied to any one story. But these pullbacks are normal and healthy for bull markets. They shake out the weak and help keep sentiment in check, which helps prevent stocks detaching from reality. They’re also typically short-lived. Sometimes the downward legs can be sharp, but markets tend to bounce back quite quickly. As shown in Exhibit 1, this bull’s had its fair share of dips, and each time stocks quickly rebounded and marched higher.

Exhibit 1: MSCI World Price Returns Since 2009

Source: Thomson Reuters.

Investors seeking equity-like long-term growth are typically best off not trying to skirt short-term volatility. Unless you know something unique others don’t—something that is big, bad and fundamentally powerful enough to wipe trillions off global economic output—you don’t really have an advantage over the many millions of other investors who all know the same things you do. Keeping a longer perspective—focusing on the outlook for the next 12-18 months—likely keeps you on a better path.

That many indexes are at all-time highs doesn’t mean this bout of volatility is different from volatility in the past, nor does it mean a bear market is right around the corner. In fact, when looking at peaks in previous bull markets, on average, those bulls continued running another three years. Record highs are just numbers—they’re not predictive of anything.

In our view, market fundamentals are strong, giving investors ample reasons to brush off recent volatility and focus on the longer term. Trade talks are sprouting up left and right, giving markets a positive sentiment boost from overall freer borders. Corporate earnings are at all-time highs and still growing, with the S&P 500 notching 5% y/y share-weighted earnings growth in Q1. And growing profits give firms plenty of room to purchase new equipment, invest in new technology and R&D, expand into new facilities and hire more employees—without spending down cash reserves and weakening balance sheets. These, and many more, provide tailwinds to continued growth—for the economy and markets.