A Unique Market Perspective
With the falling of leaves and the opening of Mt Bachelor, we reluctantly welcome the onset of cold and flu season. Each year, most Americans will be inflicted with a sickness ranging from a 72-hour sniffle to a wicked three-week illness. Many of us can remember seasons where it seemed we just couldn’t get away from sickness and were hit with multiple bugs. We all must expect to get sick sometime, it’s part of life. Living in a bubble would be the extreme measure necessary to avoid sickness. Even though sickness is expected, that doesn’t make it enjoyable. Likewise, we recognize all sicknesses are not created equal. The market is not immune to sickness either. Similarly, all market sicknesses are not created equal.
The Current Market Ailment
The global equity markets have been battling illness for the last few weeks. It was a rough start to the fourth quarter as increasing concerns over the “wall of worry” led to risk assets suffering a sharp drawdown in October. An overreaction to hawkish rhetoric from Federal Reserve Chair Jay Powell about his commitment to additional monetary policy tightening served as an initial catalyst for an increase in market volatility. Uncertainty over global trade, China growth deceleration, and Italy’s fiscal situation further weighed on markets. Despite these negatives, U.S. fundamentals remained solid with third quarter U.S. real GDP growth coming in at 3.5 percent and unemployment at a record low.
During periods of heightened volatility, it’s important to remember that large market drawdowns are not necessarily precursors to a recession. Expect it to be a bit bumpy as we progress through the fourth quarter and the start to 2019. Market pull backs, like sickness, are not fun. Even though this symptom has caught the attention of many investors, market pullbacks like this have been as common as the common cold. According to JP Morgan, the average stock market (S&P 500) decline on an annual basis is 13.8 percent since 1980. Even so, the stock market return has been positive in 29 out of 38 years. Ten percent plus declines have historically been common. Nobody wants to be sick and most rational humans are risk averse. However, illness and market pull backs are both expected parts of life.
The Economy is Healthy Coming into this Sickness
How long will this market pullback last? Is it over? Obviously, nobody knows the answer to these questions. We do know the economy has been historically strong for the last few years. Likewise, the signs of recession in the near term are low. Recessions will come though, they always do. Although investor sentiment has moved more negative, but not yet reached extreme pessimism territory, I find a number of factors supportive of the economy and markets over the near term.
- U.S. economic growth: Sound fundamentals and pro-growth fiscal policies such as tax reform and deregulation have led to solid economic growth within the U.S.
- Continuation of strong earnings growth: Strong corporate earnings growth is evident across global markets and corporate tax reform has further benefited U.S.-based companies.
- Elevated business and consumer sentiment: Measures like CEO confidence, NFIB Small Business Optimism, and consumer confidence are at elevated levels. This typically leads to an increase in capital spending and hiring within corporations and an increase in spending among consumers, all of which should support economic growth.
However, risks facing the economy and markets remain, including:
- Global policy uncertainty: The Federal Reserve (Fed) continues on its normalization path, but there is concern it will be too aggressive, pushing the economy into a recession. On the fiscal policy side, the development of tariffs and other restrictive trade policies have led to tensions between the U.S. and its global trading partners. Rising populism and political turmoil have increased the possibility for global geopolitical missteps.
- Interest rate environment/yield curve: The yield curve has flattened meaningfully this year, but the recent move higher in long-term rates has caused this spread to widen slightly. The curve has not yet inverted, which would be cause for concern.
- Higher inflation: Current levels of inflation are muted but inflation expectations have ticked higher. Should inflation move higher, the Fed may be forced to shift to a more aggressive tightening stance.
Some Closing Thoughts
One of my favorite books is the classic piece As a Man Thinketh by James Allen. He writes, “By the right choice and true application of thought, man ascends to the Divine Perfection; by the abuse and wrong application of thought, he descends below the level of the beast.”
Despite the volatility experienced recently, economic fundamentals remain solid. Credit conditions are still supportive, U.S. economic growth is positive and business and consumer confidence are elevated. Global policies and actions of central banks may lead to higher volatility, but our view on risk assets remains positive. The higher volatility has resulted in wider dispersion of returns across and within asset classes, an attractive environment for our diversified, active investment approach.
As investors, we are continually balancing a wide array of decisions. While no investor will ever reach Divine Perfection, we will continue to guide portfolios through choppy markets. I expect events like we have experienced in the last few weeks. While it’s not fun to see red numbers on our monitors, we understand periods like this are necessary and normal in the course of equity investing. Likewise, I understand these events can be stressful on investors. I remember speaking to clients when the S&P 500 sat at 683 in 2009, only to close at 2930 on September 21, 2018. I continue to be optimistic about the long-term prospects of equity investing.
David Rosell is President of Rosell Wealth Management in Bend. www.RosellWealthManagement.com. He is the author of Failure is Not an Option- Creating Certainty in the Uncertainty of Retirement and Keep Climbing ─ A Millennial’s Guide to Financial Planning. Ask for David’s book at Newport Market, Sintra Restaurant, Bluebird Coffee Shop, Dudley’s Bookshop, Roundabout Books, Sunriver Resort, Amazon.com or Barnes & Noble.
The material contained in the ’Market Commentary’ section is for informational purposes only and is not intended to provide specific advice or recommendations for any individual. The information provided has been derived from sources believed to be reliable, but is not guaranteed as to accuracy and does not purport to be a complete analysis of the material discussed, nor does it constitute an offer or a solicitation of an offer to buy any securities, products or services mentioned. Past performance is not indicative of future results. Diversification cannot assure profit or guarantee against loss. Performance of an index is not illustrative of any particular investment. It is not possible to invest directly in an index. Investment advisory services offered through Valmark Advisers, Inc. an SEC Registered Investment Advisor Securities offered through Valmark Securities, Inc. Member FINRA, SIPC 130 Springside Drive, Ste. 300 Akron, Ohio 44333-2431. 800-765-5201. Rosell Wealth Management is a separate entity from Valmark Securities, Inc. and Valmark Advisers, Inc.
