Looking ahead to the second quarter, more volatility is likely in my view.
While the positive economic trends seen in the second half of the first quarter may continue to lift stocks, the value of the dollar and oil prices will likely weigh on stock market performance.
Ironically, a potential bright spot could be an increasing inflation expectation (inflation has now been above Fed’s 2% target rate for three consecutive months).
Keeping Perspective
If somewhat higher inflation lifts bank lending rates, we believe there could be a greater willingness for banks to lend and this could indeed support business investment and a stronger economic growth outlook.
A key message from the first quarter is a reminder that double-digit stock market pullbacks are common, and don’t necessarily mean stocks are headed for a prolonged and deep bear market.
History Lessons
In fact, the world’s stock market went through a decline of more than 10% during more than two-thirds of the past 35 years and yet more than half of the time, these calendar years ended with a gain.
Not overreacting to short-term pullbacks is critical to long-term investing success in my opinion.
Having a well-designed portfolio is important, but the ability to stay disciplined through the market’s inevitable ups and downs is paramount.
This includes avoiding the temptation to chase the markets for fear of missing out, as well as resisting the urge to sell when markets correct.
Photo Credit: swiftjetsum626 via Flickr Creative Commons
