The legendary Jack Bogle, founder of Vanguard Investments, gave an interview to CNBC last week in which he said, "I have never seen a market this volatile to this extent in my career... I've seen two 50-percent declines, I've seen a 25-percent decline in one day, and I've never seen anything like this before."
The "father" of passive index investing is, of course, talking about the powerful whipsawing on the Dow Jones Industrial Average and the much broader S&P 500; sharp, triple-digit declines followed by sharp, triple-digit rallies what seems like every other day or so.
It makes sense that an investor like Bogle - a passive investor - is less than thrilled by all the action lately. And as we'll see, he's off-base in his comments.
But even nimble, active players are watching this and asking, "What's going on?"
Money Morning Capital Wave Strategist Shah Gilani is here to let us know precisely that and, even better, what needs to happen for us to go higher from here.
Here he is...
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These Moves Only "Look" Unprecedented
Mahdis Marzooghian: These are massive, powerful moves up and down, Shah - what's going on?
Shah Gilani: They're violent alright. Unquestionably, more than anything else, these are being driven by news headlines.
THERE'S PROOF: There's nothing better than banking a 1,156% gain in 14 days on one leg of a play... except making another 1,138% gain on the second half immediately after. Click here to see how it happened.
What's worrying all markets globally are really just the bogeymen of the moment: talk of trade wars, tariffs, and tit-for-tat measures - whatever you want to call them - that are likely to hit targeted companies in the United States, China, and elsewhere. In fact, Trump just threatened another $100 billion more in China tariffs, so the trade dispute could possibly - notice I didn't say "will" - escalate. On the other hand, some of the news is "political," such as the attacks on Trump and the Democrats pushing the special counsel to keep investigating the president. It's unprecedented.
And so the markets are watching. I don't get the sense that most folks are overly nervous, but watching.
If it all passes, get long and hop on board - the market's going straight to the moon!
MM: Okay, so the news is crazy, and let's not forget we've had crazy news cycles before. But earnings are growing - I believe the estimated Q1 earnings growth rate for the S&P 500 is around 17% and change. If that pans out, it could mean the best growth since Q1 2011. There's tax reform starting to kick in. You could say the fundamentals are good, right?
SG: Exactly. Fundamentals are fine, better than fine. In fact, they're collectively really strong for the most part.
MM: Okay, so fundamentals for American companies are fine overall. What about the condition of global economies?
SG: As far as economies go, they have a solid footing; it's not as if we've peaked on the long, slow-growth recession recovery track we've been on, and we're finally getting to lift-off speed. There's nothing outstanding in our way. The G-7 economies are in good shape on paper.
But like I said, investors are preoccupied by the news. They aren't committing. They're wallflowers, very much on the sidelines.
So in the absence of committed capital, stocks move up or down in huge, gap-like moves. It looks unprecedented, but it's not.
This is how the market works now, for years, but we just haven't seen it this much. Though we've seen glimpses of these huge moves before, they've been overwhelmed by a "buy-the-dip" mentality on central bank support, better earnings, and more buying.
The gaps are the result of market mechanics and high-frequency trading (HFT) bots moving most everything up and down.
MM: The $64,000 question: What happens from here, assuming not much changes?
SG: There's a possibility that within this small vacuum window - between 23,500 and 25,500 on the Dow - stocks could get sucked back down, break their lows, and drop another 10%. That could happen in a flash or in a couple of days. But then again, it may not happen.
MM: What do you think is going to happen further down the road if, let's say, the trade war calms down and buying occurs more broadly and not just in the leadership stocks rebounding and taking indexes higher?
SG: If we firm up, trade war talk subsides, buyers come back in at these somewhat lower levels, the buying occurs in the broader market, and we get above 25,500 and stay above there, we could easily be watching the next leg up in the bull market. It's just a hollow log we're sitting in now.
MM: Shah, thank you so much for taking the time to chat with me today.
SG: Anytime!
Editor's Note: Shah's a very bullish guy, as you can see, but he's all about recommending plays with the real market-crushing potential to making money no matter where the broad markets go - up or down. For instance, Shah's closed-out recommendations in 2018 - winners and losers both - returned an eye-watering average 74.28% in gains altogether... while the S&P 500 has declined 2.3% year to date. Click here to learn how he recommends cashing in on the market's best and worst stocks...