Over the last few weeks and months, economic anxiety seems to be in fashion. Stock market volatility is up significantly since November. But is short term market volatility really a problem? The long term signals that I care about still look good, and I encourage everybody to take a few deep breaths before worrying too much.
First, the stock market is doing just fine. While prices are down in the short term, adding some context changes everything. The current Price to Earnings ratio of all US stocks is about 20, which is in line with the historical norms we’ve seen in recent decades. Neither unusually high nor low, this valuation suggests that the recent drop off is more of a market correction than a signal of impending recession. This view makes even more sense when we consider that recent gains and losses have both been concentrated in the high growth, high valuation tech sector.
I see the same story in recent volatility. While prices have fluctuated more than usual, the overall market volatility index is actually totally within historical norms. I think people are mostly reacting to the end of a period of unusually low market volatility, which has characterized the recovery since 2009.
It makes a lot of sense that the markets are actually still pretty solid. Unemployment and inflation are low, consumer confidence is high, and GDP growth has been steady. Investors are pouring cash into innovative new companies, like Uber, Lyft, AirBnb, Slack, which are all thought to be planning IPOs in 2019. Some big innovations, in fields like cancer treatment, robotics, and AI, are making a big media splash. Meanwhile, plenty more is happening behind the scenes in less visible business-to-business markets.
Despite the rampant anxiety dominating headlines and imaginations around the country, America’s economic engine continues to run, stable and reliable as always. Downturns happen — in the stock market, and in the broader economy. But for long term investors, they’re nothing to fear. Taking the longer view, I still see a strong economy, a relatively normal market, and a ton of new investments being made. Every one of those invested dollars is a bet that the future looks bright. I tend to agree.