Special Edition – Thoughts on Recent Market Fluctuations

U. S. Healthcare

The market has certainly been on a roller coaster over the last few days. Many have reached out to talk about my interpretation of what we’re seeing. The reason for this blog post is to gather our thoughts and communicate them to all our readers. As always, the team at Barron Financial Group are only a phone call or email away if you have further questions or prefer a personal discussion.

Recent Market Actions & Reactions

The U.S. markets (S&P 500) were down -2.1% on last Friday, then another -4.1% yesterday (Monday). So, we’re down a combined -6.1% as of start of trading on Tuesday.

The markets today bounced around, going both positive and negative, before settling into a strong positive run and finishing the day up +1.7%. Today (Wednesday), the markets bounced around again, finally finishing down very slightly. More volatility in four trading days than we’ve seen in a long time.

Markets are driven by two different factors, fundamentals and sentiment. Both are important and either can take a leading role. Fundamentals includes the economy, corporate earnings, taxes, and political stability, among many other things. Fundamentals can be perceived as being either positive or negative, and the markets trend accordingly. Sentiment is all about investor perception. What do investors think about market valuation, inflation, politics, future economic progress, and many other factors? Like fundamentals, sentiment can be either positive or negative and the markets trend accordingly.

In my opinion, current fundamentals look positive. I see no glaring fundamental issues. The global economy is growing, inflation is controlled, unemployment is historically low and corporate earnings look strong. These positive fundamentals have been at the heart of a strong market rally that has taken place since 2016.

Sentiment, on the other hand, has waned. Many investors wonder how long the stock market rally can last. They worry that it’s been too good for too long. I know because many clients have made those very comments to me over the past months. As sentiment shifts negative, any market abnormality can initiate a vigorous selling cycle. And that is mostly what I think happened on Friday and Monday. I saw no specific fundamental news on Friday that should have spurred the sell-off. Instead, I believe selling started slowly, then the folks who were already worried the market rally had gone too long decided the correction was upon us and it was time to get out. The selling continued and as the market went lower, more people decided it was their time to get out. Selling drives markets down, inspires more selling, drives the market down further, and so on. A vicious cycle often driven by emotion.

My Take

Thus, we aren’t suggesting a reallocation away from stocks or risk. We may change that view at any time, but our sense is that Friday’s and Monday’s markets were driven mostly by emotion. If the fundamentals are indeed positive, we believe the markets will move back up, though we cannot predict the timing. We feel Tuesday’s positive market move and an essentially flat day on Wednesday are signals that reason, based on strong fundamentals, is starting to take over from emotional sentiment. Admittedly, there is no guarantee we’re right, or that it will stay that way. So, as always, we’re here watching and trying to make sense out of the market’s maneuvers.

All the best,

Jim Thibault

Barron Financial Group, LLP is a fee-only Registered Investment Advisor regulated by the Connecticut Department of Banking.

This newsletter is for general information only and should not be considered investment advice.  Investors should consult with a trained investment professional to discuss their particular situation.