Don’t Stocks Just Go Straight Up?

Last week, US equity markets went down, with the S&P 500 down almost 4%.  Since October 2, the S&P has dropped 6%.  Stop the presses!  After what seemingly appeared to be a straight climb higher and higher, a little volatility appeared for the first time since February.  It’s a good time to reflect on a few universal truths:

  1. Stocks are risk assets. They don’t go straight up.
  2. Stocks represent ownership in a business. Over time, businesses that create value should see their value and, hence, their stock prices go up.  However, valuation is based on a number of things, including interest rates.  Interest rates are going up from abnormally low levels.  The stock market is finally starting to recognize interest rates are going up. Anyone who tells you how high rates are going to be is guessing.  Someone will guess right and earn the coveted “genius” label by the financial press.  But, remember, that person is guessing.
  3. The economy has cycles. See above – anyone who tells you he knows when the cycle will change is guessing.  There are signs that the economy is slowing down.  There are also pockets of the economy that are accelerating.
  4. Above all, remember that volatility and change, as scary as they are, create opportunity.

If you are investing for the long term (10 years or more is my definition) and you panic, my advice is to not look at account statements for a while.  Keep investing.  Over time, stock valuations reflect economic growth.  The US and world economies are going to grow over time.  Don’t do anything rash.

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