Should clients be alarmed about the markets?

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Suppose somebody came up to one of your clients and shouted: “I have terrible news about the economy. You should sell your stocks!”

Alarmed, the client replies: “Oh, my. Tell me more!”

The mysterious stranger shouts: “Run for the hills! The American economy just added 200,000 more jobs — more than expectations — and the unemployment rate now stands at 4.1%, the lowest since 2000! There’s more! The average hourly earnings of American workers have risen 2.9% from a year ago — more than expected and the most since June 2009! Sell your stocks while you can!”

The client reaches out to you, agitated and confused.

Odds are you don’t find this alarmist argument very persuasive, but then again, your job is plan for the long term, not for a day, week or month.

To understand the anxiety that led to many investors rushing to sell last week, you need to follow some tortuous logic. According to the alarmist view, those 200,000 jobs might have pushed America one step closer to maximum employment — the hard-to-define point where companies have trouble filling job openings and have to start offering higher wages. That’s not a terrible thing for most of us, but the idea is that if companies have to start paying more, then they’ll be able to put less in their pockets — and the rise in the hourly earnings of American workers totally confirmed the theory.

If you’re an alarmist, it gets worse.

If American workers are getting paid more, then companies will start charging more for whatever they produce or do, which might boost inflation. “Might” is the operative word. There have been few signs of higher inflation, which is still not as high as the Fed wants it to be.

Suppose you’re not an alarmist. You may have read that 18 states began the new year with higher minimum wages, which might have nudged up that hourly earnings figure that looked so alarming. And some companies have recently announced bonuses following the huge reduction in U.S. corporate tax rates, whose amortized amounts are also finding their way into wage statistics.

The question we all must ask ourselves is: Are we alarmists? Selling in anticipation of a bear market has never been a great strategy, even though stocks are admittedly still priced higher than they have been historically.

If you are not an alarmist, then you have something to celebrate. The S&P 500 has now officially ended its longest streak without a 3% drop. It’s a historic run not likely to be seen by any of us again.

As advisors know, market pullbacks are normal. I know they may feel terrible but, in reality, a 3% to 5% drop is healthy in a typical bull market. This sell-off may be more a reversion to the mean, rather than a precursor of a more severe adjustment or a bear market.

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