Fasten Your Seat Belts for Market Turbulence—Keep Your Eyes on the Destination

To anyone who has travelled, a familiar announcement over the loudspeaker goes something like this:

“Ladies and Gentlemen, this is your Captain speaking. We are experiencing some turbulence and we ask you to remain in your seats with your seat belts fastened.”

This is an easy quote to apply to the current conditions in the stock market, and those seen in the past few weeks. I do think though, that the Captain could easily add some crucial points:

  1. Despite the turbulence, which is normal, we are aware of the destination and we will get there as planned.
  2. Taking off your seat belt could cause serious harm.
  3. These conditions are temporary, we will be through them soon and then on to a smoother journey towards your planned destination.
  4. Nothing about the conditions changes the destination we always planned. We may need to go higher, lower or possibly slightly around the turbulence, but the destination remains the same.

Key Tidbits from Current Finance Headlines

I did a large volume of weekend finance reading and replays of conference calls. Wrote copious notes and feel you will benefit from several of them. Some are headlines, some are quotes. Without giving credit to each one, in the interest of sparing my typing fingers, have a look:

US Economy leads global expansion. Bolstered by large scale tax cuts and increased government spending, the US has accelerated to its fastest growth in four years.

Late in the business cycle but few signs of it ending……a recession is unlikely within the one-year forecast time horizon.

Volatility is due to market concerns about future growth – investors want to know if companies have reached peak earnings.

In the second quarter, profits in the US climbed 26% year over year and revenue growth was 10%.

We continue to believe that the speed limit for the developed world has increased since the global financial crisis as confidence among business and consumers has been restored.

US Dollar strength likely to persist over the longer term. We continue to expect long term US Dollar strength in light of Brexit, an economic slowdown in Europe and competitiveness issues in Canada.

Overall, economic growth is slowing, but not falling off a cliff. The market is presenting buying opportunities and has gotten a lot cheaper lately.

Canadian Market Volatility

The banks have traded at 9-13 times earnings. Right now, they are trading at about 10 times. Dividend yields of about 3.7% – that’s attractive. They aren’t dirt cheap, but they are at the lower end of their historical valuations.

S&P 500 Earnings in 2019

On earnings for the S&P 500 next year – with the US, this is where the debate is. The consensus thinking is for a 10% increase in growth. Even at half of that growth it is not a ridiculous number to pay for high quality companies.

Potential for Higher Returns Ahead

If you have a reasonable time frame, your potential to make higher returns is far greater buying during the dips of the market rather than selling.

This finance veteran has been through many bouts of market turbulence. We do our utmost to explain that this sort of volatility is normal, often healthy, and typically means we need to exercise patience and faith in our plan.

One thing that I have seen with absolute consistency is that every single market pullback leads to higher markets in future. Every. Single. One. This will be no different. We cannot change the fact that these conditions occur – we can only choose whether to react to them.