Oh, the stock market’s drops are frightful … The fundamentals are so delightful. So as long as there’s fuel for growth … Let it roll, let it roll, let it roll.
Sorry. I’m not Oscar-winning lyricist Sammy Cahn, who wrote the original song. But the message is right on.
Staying even-keeled is difficult but crucial when stocks swing hard. Volatility isn’t predictive. “Past performance doesn’t dictate future returns” – isn’t just boilerplate legalese. Stocks aren’t what statisticians call serially correlated – one day’s price movement doesn’t determine the next. So the more volatility we get, the more you should hang on, unless you know bad things others don’t, which is exceptionally hard.
It can be hard to fathom stocks recovering while fear reigns. But fear is backward-looking. Everything investors fear today is old news, rehashed repeatedly like cows chewing cud.
Stocks are forward-looking. Corrections end before fears fade because markets collectively fathom what fearful investors don’t.
Surviving volatility requires remembering your long-term goals and focusing on what others miss: like big corporate earnings growth. Third-quarter profits for Standard & Poor’s 500 companies jumped 26 percent year over year. Seventy-seven percent of firms beat prior expectations. Analysts expect 20.6 percent full-year growth, plus 8.6 percent next year. Some say it’s all just a sugar high from tax cuts. No. Revenues rose 9.3 percent from the third quarter of 2017. This is under-appreciated organic growth from a fundamentally growing economy.
Adjusted for inflation, global third-quarter GDP rose 2.4 percent year over year. J.P. Morgan’s Global Composite Purchasing Managers’ Index (PMI) hit 53.2 in November, implying growth, and more of it ahead.
Yes, European stocks struggle. Yet eurozone GDP has grown 22 consecutive quarters. The U.K., buffeted by continual Brexit uncertainty, has grown 23 consecutive quarters. Meanwhile, despite tariff dread, world trade rose 3.5 percent year over year in September.
Growth should continue. Conference Board Leading Economic Indexes, great future predictors, are overwhelmingly high and rising, led by the U.S. and eurozone. Most countries’ PMIs show rising new orders – today’s orders are tomorrow’s production. Businesses are expanding to meet future demand, not contracting. Global lending grew a healthy 6.9 percent year over year in October. “M2” money supply grew 6.4 percent. Global inflation, excluding food and energy, is a tame 1.9 percent.
Gridlock helps stocks
Yes, political headlines rage ugly. President Donald Trump feuding with Nancy Pelosi and Chuck Schumer! French “Yellow Vest” protests! Italy’s budget battle! Brexit! Yet all these amount to gridlock, which stocks adore. When politicians squabble, they aren’t passing radical legislation that could roil markets.
Now we get a split Congress, so traditional gridlock replaces the intraparty gridlock we had for two years with Republicans heavily fighting among themselves. Plus, as I’ll detail next week, the third year of a president’s term is routinely the four-year political cycle’s sweet spot for stocks, with the highest average return and no down years since 1939. This third year should be no different, with Trump and his potential challengers positioning for 2020 instead of passing controversial bills.
Across the pond, Britain’s parliament can’t even pass Brexit, never mind anything else. Prime Minister Theresa May is politically wounded after last week’s attempted ouster. France’s protests drained President Emmanuel Macron’s political capital. Passing big changes will be difficult. Voters are starting to turn on Italy’s new populist government, forcing moderation. German Chancellor Angela Merkel, now a lame duck, heads a fragile coalition and faces open rebellion within her party. All across Europe, stocks will benefit from legislative calm.
So remain calm. Own stocks. The fire is nice. Don’t get left in the cold.
Ken Fisher is founder and executive chairman of Fisher Investments, author of 11 books, four of which were New York Times bestsellers, and is No. 200 on the Forbes 400 list of richest Americans. Follow him on Twitter: @KennethLFisher
The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.
Publication: USA Today| Don’t let volatility in the market be a lump of coal in your stocking