It’s Healthy There’s Always Something to Complain About
Either the market is going up too fast or the market’s going down too much. Or, these days, it is the market is too stable. The idea du jour is that the longer the stock market is so stable, the more likely when it does go down, it will collapse. I think that concept is mostly just another form of fearmongering. Anything is possible in the stock market, but there is no particular reason why a period of market stability must be followed by extreme instability. More likely, a period of stability may simply be an unusual period relative to the market’s more normal volatility.
As my colleague, JoAnne Feeney, has written so well not long ago, market volatility is totally normal and well documented. We forget it rather easily, because we adapt so readily to periods of low market volatility. Yet, we also recognize that the recent unusual stability is well…unusual. We know it will not last. But, why should a period of stability necessarily be followed by a period of exceptionally high volatility? There’s no theory I am familiar with that implies that well above average volatility must follow one of low volatility. All we know is that markets are volatile and sometimes they are above average in volatility. More fundamentally, what determines market volatility? One factor, without any doubt, is the risk of an economic setback or recession. But the prospects for ongoing economic growth remain quite strong, especially since Europe is now hitting its stride after a weak economic period.
Retail sales and passenger car sales are showing solid gains across Europe. Industrial output in Germany is booming. Unemployment is declining at a healthy clip across the entire continent (and also in Japan). In Spain, the unemployment rate is now down to 18% after hitting 25% just 2-1/2 years ago. This kind of positive momentum implies continued solid growth ahead and provides a sound basis for the ECB to reduce its own bond buying program. And the power of the European recovery will provide solid impetus for export growth for all of its trading partners, including us.
We’re now heading into the heart of earnings reporting season for the second quarter. The first quarter was exceptionally strong, around 14% more or less, depending on whose numbers you use. But the second quarter is estimated to show a solid 8% gain and expectations reflect even better reports in the second half. So while we bask in all this good economic and earnings news and understand it can’t last, there’s just no good reason to think it will end within the visible horizon. It’s permissible to enjoy it while it lasts.
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