Last year, stocks marched higher with only minor pullbacks. When the year ended, the largest peak to trough decline for the S&P 500 Index* was just under 3% (St. Louis Federal Reserve data on the S&P 500). It was a year that had relatively little turbulence and one that rewarded diversified investors. However, since the beginning of February, volatility has returned.

That volatility has returned is a reminder that periods of relative tranquility don’t last forever. But, while I recognize it can create uneasiness among some investors, I believe it’s something that the long-term investor should look beyond.

If we were facing serious economic problems — something that might be signaling a recession — it would be a cause for concern. Yet, looking across the full landscape of issues, both present and visible on the horizon, right now I just don’t believe we are at that level of elevated risk.

Shorter term however, headline risk continues to whipsaw sentiment.

So, what’s behind these higher volatility readings? My take on it is that there are two dominant influences:

Last month President Trump announced he will impose steep tariffs on steel and aluminum imports, fueling concerns over protectionism and the potential impact on the economy. His apparent goals: Pry open foreign markets to U.S. exports and discourage theft of intellectual property developed and owned by American companies.

Before I go on, let me say that it is not my role as your financial advisor to offer up opinions on political issues. However, it is incumbent upon me to analyze and share my thoughts on headlines that are influencing shares. It’s not a political statement. It is a commentary on events viewed through the narrow prism of the market.

Investors viewed the corporate tax cut and the paring back of regulations favorably. Trade tensions, however, have created uncertainty.

Most economists support free trade. It’s a net benefit to the U.S. and global economy. But “net benefit” means there are both winners and losers.

Losers – those whose jobs disappear amid a flood of cheaper imports. Winners – consumers who pay less for various goods, and those who work in export-oriented industries. In 2017, U.S. exports totaled $2.3 trillion (U.S. Bureau of Economic Analysis). Yes, that’s trillion with a “T.”

Free trade versus fair trade – it’s a highly debated topic.

U.S. manufacturers are consumers of steel and aluminum, including farm and construction equipment, aerospace, and pipelines and drilling equipment in the energy industry.

At the margin, it may modestly boost inflation and could force some U.S. manufacturers to put projects back on the shelf or move production offshore.

Additionally, U.S. tariffs may invite retaliation, pressuring exporters, jobs and profits in globally competitive sectors. It could also spark a tit-for-tat trade war that hurts everyone.

As the month came to a close, Trump announced he is set to raise tariffs on Chinese imports. In return, China announced new barriers to some U.S. goods, though the response was measured. None of these changes has actually been implemented yet. Indeed, Trump has gone so far as to say what various countries could do to avoid tariffs. He has made it clear that his administration has turned to tariffs as a tool of encouragement: he wants behavioral changes from our trading partners. Nevertheless, while the odds of a major trade war remain low, all this has injected uncertainty into market sentiment.

Meanwhile, troubles popping up in the tech sector have added to volatility. For example, Facebook is embroiled in a controversy over privacy and data sharing. More recently, Trump has set his sights on Amazon, expressing his displeasure in several tweets.

Yes, they are only two stocks, but both have performed admirably, leading the tech sector higher. And, they have a combined market capitalization of $1.1 trillion (WSJ as of 4.3.18).

Perspective:

I provided an explanation for the recent volatility because I believe one is in order. But, let me caution you not to get lost in the weeds. Day traders care about minute-by-minute swings in stock prices. Long-term investors sidestep such concerns (and probably live longer).

So, let’s step back and gather some perspective by reviewing the data.

According to LPL Research —

  • The average intra-year pullback (peak to trough) for the S&P 500 Index* since 1980 has been 13.7%.
  • Half of all years had a correction of at least 10%.
  • Thirteen of the 19 years that experienced an official correction (10% or more) finished higher on the year.
  • The average total return for the S&P 500 during a year with a correction was 7.2%.

These bullet points are an evidenced-based way of recognizing that turbulence surfaces from time to time. Patient investors who don’t react emotionally have historically been rewarded.

I understand that some degree of risk is inevitable. But our recommendations are designed to minimize risk, and they are designed with your long-term goals in mind.

I hope you’ve found this review to be educational and helpful. If you have any concerns or questions, let me say this one more time – please feel free to reach out to me. That’s what I’m here for.

As always, I’m honored and humbled that you have given me and my Denk Team the opportunity to serve as your financial advisor.

If you have any questions or concerns, let’s talk. I’m simply an email (Ron[at]denkinvest.com) or phone call (602-252-8700) away.

Market Minute 4/6/2018Not! An idea that may affect our country for generations.

As the markets continue their gyrations, and the US and China try to one-up each other on rhetoric to look strong to their domestic populations, I’m going to pontificate a bit more. Thanks to Brian Westby for this idea and also for prompting me to write about something that’s been on my mind for quite a while.

One of the most important questions we have about our country’s future is whether prosperity itself will make the American people lose sight of where that prosperity comes from; whether we’ll forget to cultivate the attitudes about freedom, property rights, and hard work that have made not only us great but also all the other places that have followed the same path.

This has nothing directly to do with who is president or which party controls Congress. It has nothing to do with the tax cut, or recent tariffs, or federal spending, or red tape cut or added. It runs much deeper than that and will affect all of these issues over the very long term, for many generations into the future.

The issue comes to mind for personal reasons, as several of us travel around the country with our high school juniors looking at colleges.

We’re not here to criticize any particular school. But here’s what we notice on our visits: at some point, the college admissions officers in charge of the meeting will talk about great accomplishments by students or recently-graduated alumni. Invariably, the accomplishments are volunteer efforts of various sorts that help people in some far off land or, sometimes, here in the US.

I think stories like this deserve to be told. They’re important and worthy of honor. But, not once, in all our collective college tours have we ever heard a school bring up someone who, say, grew up in tough circumstances, was maybe the first in their family to go to college, and has since gone on to become a very successful entrepreneur, investor, or key officer at a large company, like …someone who has gone on to create wealth for their own family and others as well.

Not once.

Which is odd because we know these colleges must have tons of these stories that could be told. You can tell when you’re taking the tour after the admissions sessions when you walk through the campuses and see the dorms, classrooms, and athletic centers many of which are named after alumni who’ve cut enormous checks.

Maybe stories of business-oriented success are just not on the radar of the kinds of people who run admissions offices. Or, worse, maybe they think it’s embarrassing or that there should be some sort of shame associated with striving to generate wealth.

Either way, they seem out of touch with why so many of their students want to go to college in the first place. “Making the world a better place” is not just about volunteer work; it’s about personal ambition and desire mixing with the invisible hand to raise the standard of living for everyone.

Capitalism isn’t a dirty word and the long-term success of our civilization means making sure our children know it.


 Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk
www.denkinvest.com

This weekly article reflects news, commentary, opinions, viewpoints, analyses and other information developed by Denk Strategic Wealth Partners and/or select but unaffiliated third parties. DSWP provides Market Information for illustrative and informational purposes only. If you wish to receive this weekly commentary by email please contact us at 602-252-8700 or by e-mail at lindaw(at)denkinvest.com. If you are receiving this commentary via email and would prefer not to please let us know either by email or phone.

Ronald Denk is an Advisory Representative offering services through Denk Strategic Wealth Partners, A Registered Investment Advisor. He is also a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

Denk Strategic Wealth Partners is not affiliated with Lincoln Financial Securities Corporation. Information in this commentary is the sole opinion of Denk Strategic Wealth Partners. Past performance is no guarantee of future returns. All market related investments involve various types of risk, which include but are not restricted to, credit risk, interest rate risk, volatility, going concern risk, and market risk.

The Update provides information of a general nature regarding legislative or other developments. None of the information contained herein is intended as legal advice or opinions relative to specific matters, facts, situations or issues. Additional facts, information or future developments may affect the subjects addressed in this document. You should consult with an attorney, accountant or DSWP planner about your particular circumstances before acting on any of this information because it may not be applicable to your situation.

Lincoln Financial Securities and Denk Strategic Wealth Partners and their representatives do not offer tax advice. Please see your tax professional regarding your individual needs.

*The indices are representative of domestic markets and include the average performance of groups of widely held common stocks. Individuals cannot invest directly in any index and unlike investments, indices do not incur management fees, charges, or expenses, therefore specific index returns will be higher. Past performance is not indicative of future results.

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