Stock market turbulence is back.
While we would not be surprised to see more stock market ups and downs in the short run, Simply Money Advisors believes that stocks will still increase in value in 2018 as the economy and corporate profits continue to grow.
It's important to remember that minor stock declines of 5% to 10% are normal. Since 1980, the average drop during a calendar year for large-company stocks is 14%, and yet these stocks finished higher for the year about 84% of the time.
What's not normal is the lack of a pullback over the past year. The biggest decline stocks saw in 2017 was a mere 2.8%, and the last time there was a decline of more than 10% was early 2016.
Investors are searching for a reason for this recent minor drop in stocks, and the fear of inflation is what's concerning most analysts. However, inflation is not yet a concern for the broad economy. According to the preferred inflation measure of the Federal Reserve (Fed), our nation’s central bank, prices are only 1.5% higher over the past year.
On the other hand, the January jobs report showed that wages were 2.9% higher compared to last year. This is the quickest increase in eight years.
To combat inflation potentially making its way into the broad economy, the Fed is expected to increase short-term interest rates three times in 2018. Even if the Fed does this, short-term interest rates will still be very low by historical standards.
Meanwhile, we’re about halfway through corporate earnings season, and corporate profits are nearly 15% higher compared to a year ago. We expect that profits will continue to increase throughout 2018 due to corporate tax reform and an expanding economy.
The Simply Money Point
Because there are very few economic data releases this week, Wall Street will be watching for signs of more stock market turbulence. But remember, most large stock market declines occur around economic recessions, and recession risk is still very low.
This is why we currently view these recent stock losses as normal for the stock market. Simply Money Advisors believes that investors like you should instead be focusing on the growing economy and growing corporate profits