History, they say, is just one thing after another. I guess that’s true. A corollary to this might be the quote, “History does not repeat itself, but it often rhymes.” Thinking back over the past ten, fifteen or twenty years, we’ve seen a string of unprecedented headline-grabbing events. All different and unique, but similar in their impact - positive and negative - on the economy of our nation and the world. The same will be true for the next ten, fifteen or twenty years. New unprecedented events will shake investor confidence and create uncertainty. Though we wish this wasn’t the case, uncertainty over what’s ahead is a natural part of investing in the stock market. It has always been so. Corresponding market volatility is the rule, not the exception, but trying to avoid it might actually be detrimental to meeting your longer-term needs and goals. Stock market investors must accept this as normal.
Headlines focusing on economic and fiscal policy have kept the investing world on edge in recent weeks, led by the rapidly shifting events in the ongoing trade war. Late on Friday another shoe dropped as the credit rating agency, Moody’s, decided to lower its official rating for US debt from AAA to Aa1. Moody’s was actually the third major ratings agency to do so. This trend began back in 2011 when S&P surprised the world as the first to drop the US’s credit rating from its strongest position. In 2023, Fitch made the same determination. It shouldn’t be a surprise that Moody’s has now joined the party.
Behind Moody’s decision is their opinion that the US budget deficit is way too high and if Congress decides to extend the 2017 Tax Cuts and Jobs Act, it may add about $4 trillion in debt over the next decade. Our political leaders have been happy to keep kicking the deficit can down the road, and we will likely see more of that in the near term. Eventually, however, this must be dealt with, and politicians will be forced to make some unpopular decisions. For now, though, it will be business as usual.
The White House has managed to unwind some of the tariff turmoil but there will no doubt be more unsettling economic and fiscal headlines ahead. This seems to be the style of the current administration. My advice: prepare yourself for more uncertainty, but don’t overreact. Remember that trying to time the market never seems to work. Selling and buying back when “things settle down” is likely to cost you rather than save you money. Stocks don’t tend to rally when the problem of the day is resolved, they rally when there’s evidence that things are getting “less bad”.
We remain hopeful that the economy will be guided out of these near-term mini crises and be able to regroup and rally into the future. This has been the long-term trend and that cannot be argued. Also, there is always good reason to put your faith in corporate management to continue to find ways to be profitable. After all, that is the main driver of the stock market. While there are never guarantees, there is good reason to continue to keep your focus on your long-term financial plan and keep the faith.