Stocks are off to a volatile start in the New Year, as a weak January was followed by a strong February. March saw lots of ups and downs as the events unfolding in Ukraine surpassed economic news in the U.S. in importance. When it was all said and done, stocks were able to end the first quarter with a small gain. The bond market also experienced small gains during the quarter as inflation remained a nonfactor.
In our letter from the end of 2013 we discussed the chances of a stock market correction given the length of time since the last one. We can say pretty much the same thing today, as we have now gone over nine hundred days since the last 10% pullback in stock prices. This is the fifth longest stretch without a correction in the last fifty years. There are a couple of things to take from this: First, our economy has been steadily growing over the past five years and has not suffered a significant drop off during that period. Second, when stocks do have a correction, and it will happen at some point, it does not necessarily mean that the bull market is over. Healthy markets suffer pullbacks, and these pullbacks keep the market from getting overly expensive.
The biggest risk currently for the market as well as the economy is the threat of violence in the Ukraine and the fear that the violence will spread. Geopolitical events like this cause problems because of the fear that these events will escalate and involve other countries, including the U.S. Fortunately, the worst case scenario rarely plays out and calm is restored. Until that happens, this will hang over the market and we will see gains on good news and drops on bad news.
The strong market fundamentals we listed in our last letter remain intact. The economy continues to expand, inflation is low, and interest rates remain low. Corporate earnings are forecast to rise during the year. Earnings multiples on the market remain reasonable, which suggest that the chances of a major bear market are low. As things now stand, we would be buyers on any market weakness.
Lastly, we would like to remind everyone that it is always a good idea to review your asset allocation at least once a year. As things change in our lives or as we just get older, we need to ensure that our portfolios are properly aligned. Please feel free to contact us to help with this review.