Remember, market declines are normal - “Don’t throw the baby out with the bathwater” as we look forward to promising 3rdquarter corporate earnings with a backdrop of a growing US economy.
With all time market highs back on Sept. 20th, most of the market focus had been on positive news: Mexico and Canada new trade agreement, strong economy and employment, low inflation and interest rates with the best corporate earnings in years.
What happened? A “perfect storm” can always come at any time when a series of events occur together, jolting the markets: Rapid increase in Italian bond yields, China slow down and trade war, increasing US Treasury bond yields and specific global chemicals companies/sectors, such as PPG, paint manufacturer’s recent pre-announcement of earnings miss due to higher costs, slowdown in China and increasing tariffs. This was compounded by warnings from other sectors/companies such as auto’s, computer chip makers and even luxury goods, such as Tiffany (TIF, Jewelry Products) generally due to China sales restrictions. The Federal Reserve’s recent message was vague to overly hawkish on expected interest rate increases which spooked the markets.
Why so much selling If the US economy is strong and corporate profits up? Fear of US economy hitting wall and recession worries became the focus. Stocks in sectors that have been up the most such as technology and big names - Amazon and Netflix - generally sell off the most in market corrections. Also selling leads to specific technical decline markers which can result in computer-based trading (think automatic) resulting in panic like over selling with increased volatility. The market is not conditioned to higher rates and volatility should be expected but this does not mean the market will go down further or not increase to new highs. We need treasury interest rates to stop rising which will happen when the fear of an imminent recession resides.
What to do? Always remain calm during these rapid declines – don’t panic. Fear trades such as buying gold or even flight to quality via buying US treasury bonds is not what is happening. Realize that most portfolios have had nice increases in values this year and over the last 12 months; most client portfolios are only down 1-2% through yesterday this month. Today’s selling looked more like a catharsis, which can mean a bottom, although the decline may continue. Keep perspective and see opportunity for future gains and bottom fishing. Market dips and even 10-12% declines/corrections are normal and even healthy for values to go higher. Buying opportunities in attractive sectors will likely arise from this decline and more attractive prices should result from rebounds of sectors that may need to be reduced/sold at higher prices. China related issues are likely a major cause of this volatility and this could be corrected with any news regarding trade talks or rumors of any resolution. The focus questions are how much of this decline is due to fundamental issues and how strong will 3rd quarter corporate earnings and outlook reporting be, starting this Friday? Finally, the Federal Reserve may be responsive to any fundamental related, economic slowdown and in turn, decide not to increase rates as aggressively in 2019.
Steve Erken, CFP®
Principal
Date: October 10, 2018