Written by: Benjamin Bimson CIMA® / CIO, BCJ Financial Group
I live near two small airports. On occasion I see airplanes that are obviously student pilots doing all sorts of drills to learn the requisite knowledge they need to fly without an instructor and to obtain their private pilot licenses.
In fact, I dreamt of flying growing up, even beginning my college career adamantly determined to become an aeronautical engineer. Flight still fascinates me. One drill that student pilots need to master is how to recover from a stall.
Every airplane has a maximum flight elevation as well as a maximum height they can go when they are travelling at an extremely steep angle. When that point is reached, whether it is due to an incredible steep climb or just the maximum height physics determines the airplane can go, the engine stalls.
If you have had the pleasure of watching an air show, you might recall the aerobatic pilots and their ability to fly their airplane straight up until it stalls, hangs in the air and pivots to plunge downward, often pulling up just as the crowd begins to get slightly nervous that they might be getting dangerously low. They roar back and repeat their tricks.
Why am I talking about stalling airplanes? Well, this happens in the market too.
Looking at the stock market from late 2017 to now, it looks the same. The biggest difference is that it is a bit less thrilling for investors than watching an airshow. We know the pilots are trained and likely to recover and that it is all part of the show. We always wonder about the market, because sometimes it doesn’t recover until it goes much lower than we feel comfortable watching it go.
When I talk about the market stalling, it can easily be seen in price charts. The market moves upward in a phenomenal climb, but the higher and faster it goes, the more likely it is to stall at some point, and where that may be, is not always clear at the outset.
For much of 2016 and all of 2017 the market ascended the price charts, then it stalled, came down, recovered, went down, recovered yet again, stalled… you get the point. To visualize this, you can just look at the S&P price chart below. It is easy to look at the price chart in the same way you would follow the smoke trailing behind an acrobatic airplane in a show.
The worst part of watching this show is that we cannot tell exactly how this show ends. Will it get more frightening? Are the dips that we have witnessed so far, the worst of it or is there more to come?
Many had hoped that earnings season would cure this spell of market stalls. So far, it has not produced the desired effect. However, neither has it produced a phenomenal stall. There are risks, and to be fair, there are always risks – just like flying always has risks, even on airlines with more than 40 years of stunning safety.
For now, we must continue to be patient. That is hard to do because investors like positive results “right now.” Be careful to keep those emotions in check.
It is a wait and see game and nobody wants to see a crash. The good news is that, so far, this airplane has stayed in the air!
1 U.S. Markets Amy Lubas, CFA & Chad Ellis. Ned Davis Research Advisory. March 28, 2018 [4/5/18]
2 Chart: Standard & Poor’s 500 Stock Index Chart. Ned Davis Research. Daily Data 1980-10-10 to 2018-04-04. [4/5/2018]
3 Sectors and Industries. Amy Lubas, CFA & Chad Ellis. Ned Davis Research Advisory. April 5, 2018. [4/5/18]
4 Chart: Global Recession Probability Model. Ned Davis Research. Monthly Data 2007-06-30 to 2018-03-31. [4/5/18]
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