American Funds video transcript: “Why This Market Correction Is Healthy”
Will McKenna: You’ve been saying for some time that we should probably be expecting a pullback here in the markets, and here we are.
Can you talk about this current pullback in the market and volatility and what’s behind it? What’s driving it?
Tim Armour: Sure. Will, as you know, the markets have been very strong now for quite some time — really up until 10 days ago — and for good reason. The global economy is improving, and has been improving for quite some time. Interest rates have been at all-time lows. Central banks around the world have been priming the pump, so we can fully recover globally from the financial crisis. So there’s been a very strong backdrop. But with that, equity markets have appreciated a lot without any real pullback for quite some time. In fact, we’d had the longest period of time ever recorded before having a 5% pullback until recently, in the last couple of days here. So my view is we were overdue for some kind of correction. As you know, we’re really focused on the long term and want to pay attention to what the long-term opportunities are. And we still feel pretty good about the economic backdrop for corporate earnings, what that means for earnings growth, and we think there are plenty of opportunities out here. So I would categorize what we’re experiencing right now as really just the market taking a breather. There are some unusual things going on that we can get into, but I’m not overly concerned about this pullback at this point.
Will McKenna: So it’s safe to say you see this as a little bit more of a pause or a healthy correction, not necessarily signs of something bigger as we go forward.
Tim Armour: Yeah, I think that’s right. You know, markets do better when they have corrections periodically. You just can’t go up all the time. The thing that we keep a close eye on, really, is interest rates, because that is the one measure that has been most important to the equity markets, I think, over the last several years. And there has been a change. Interest rates bottomed a few months ago and have been slowly ticking up. And that makes everybody, rightfully, a bit cautious, so we need to pay attention to that.
On top of that, we’ve had unemployment levels continue to drop, and economic growth is improving. And even most recently, we’ve had good wage growth. So there are concerns now that inflation could be coming down the pike and if so, what does that mean for interest rates? Presumably, it means rates will continue to move up. So at some point if interest rates move too rapidly, one would have to question are equity values appropriately reflected in the markets today? That, to my judgment, would require a pretty big move in interest rates. Thus far we’re not seeing that, so we think the backdrop remains pretty positive. But this is a healthy process to get some of the froth out of the market, I would say. And so we think this is pretty natural. And having some greater volatility in the market now probably is healthy for the market. We hadn’t seen much volatility for quite some time.
Will McKenna: Tim, you’ve been an investor with us for 34 years. Presumably, you’ve been through a good handful of different market cycles. Love to hear your experience and that broader perspective that you can bring to what we’re currently experiencing today, and how your experience through those prior cycles informs your thinking today.
Tim Armour: I’ve seen a lot of market cycles and lived through a lot of very volatile periods of time. And one thing’s common, I think, in all market cycles — particularly the down ones: It’s scary. It’s uncomfortable. You wonder how far it’s going to fall. And one of the advantages of having been at this so long, you understand — or begin to understand over time with experience — that none of us can predict what the market’s going to do in terms of going up or down. But what we can do is identify good companies that we know are growing companies, that are going to be better and bigger companies in 10 years and have greater earnings. And if we get those companies right through all sorts of market cycles, we’re going to do well for our investors, and that’s what it’s all about.
So I think the most important lesson, Will, I’ve learned over time is you have to contain your emotions. It’s not easy to do. It’s not easy to do on the way up, and it’s not easy to do on the way down. But it is your enemy in terms of creating wealth over time. So sticking with fundamentals in terms of what your beliefs are, having good asset allocation, a balanced portfolio with a long-term horizon, is the best thing I can advise for any investor and what we really try and practice here at Capital, day in and day out.
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