“Nothing creates fear like the belief that market declines are being caused by some fundamental problem.” A quote we read last week from Brian Westbury, Chief Economist at First Trust Advisors L.P. His economic take was fascinating and I am paraphrasing him below:

The thing is: We don’t see any serious fundamental problems.

  1. Private sector jobs have increased for 65 consecutive months. There is clear improvement in housing and construction. Auto sales are near record highs, and rising. Yesterday it was reported that in August, we were on a 17.8mm run rate for new auto purchases. Profits outside of energy continue to grow.
  1. Since the crisis of 2008, pundits have convinced themselves that the bull market in stocks is because the Fed and multiple quantitative easings have created a “sugar high.” Where is the proof in that assumption? The money supply (M2) has continued to grow at a moderate 6% pace per year. Nobel Prize winner Milton Friedman would argue that money supply growth would have to be torrid for this assumption to be accurate.
  1. The fear a few years ago was that the Fed, by lowering rates and tapering to zero, was acting out of desperation and this was a bearish sign that things were really bad. It seems that in an economy growing by 2-3% per year, the world did not come to an end. Now we are told that raising interest rates will be the blow to the economy. What is it, higher rates or lower rates that we should fear? Does anyone out there think a 0.25% federal funds rate will stop the economy dead in its tracks? I bet you will go out and buy the next iPhone7 once it is released, or won’t refrain from visiting Target for your sundry list of bathroom and kitchen supplies and Wal-Mart for your bananas!
  1. Yes, China is slowing. So what? Exports to China make up 0.7% of US GDP. I heard so much about the sun setting on Japan in the early 1990’s (and here we are, over 25 years later) with what was once the world’s second largest economy still in the global top 5 and the capital markets didn’t exactly collapse because of it. If you have been invested over the past 25 years in stable dividend paying businesses, you would be quite happy with the results.
  1. What about the Chinese currency, the dreaded Yuan. Wasn’t it to be the world’s next reserve currency, taking the U.S. dollar down to extinction? The very same people who were on that topic are now the very same people telling us the Chinese devaluation is a calamity. Which should we fear, a rising or falling Yuan? Answer, neither.
  1. As Warren Buffett has shouted from the mountaintops – corrections are about moving capital from weak hands to the strong. That’s exactly where we are today. This correction seems technical, been a long time coming – we’ve gone far too long without a 10% decline. So now it’s here. It is normal. Corrections and bear markets are scary, but it pays to hang on, why would it be any different this time around? Our view is that it is not due to fundamental factors. We can’t prove it to you just yet, but that’s what corrections are all about – opportunity in the contrarian, opportunity to envision a day when shares are once again ardently pursued by others. In the meantime, don’t let them shake your confidence.

We know it’s tough to focus on the fundamentals of the economy and the long-term outlook when everyone around you dwells on each day’s market action and comes up with all-inclusive macro-economic theories to explain them. But investors need to trust the fundamentals and those are still signaling more growth ahead. Let’s stick to being disciplined and planning for success.

– John Schloegel and Jeff Dodson