It’s hard not to notice the decline in the stock market. As much as we would all rather think about turkey and dressing, we don’t want the week to run out without at least some comment on the market.
- Extent of the Decline
In October, the S&P fell nearly 10% from September highs, and while November began on a positive note we are retesting October lows for the S&P. International stocks are down more than domestic, and bonds also delivered a moderately negative result in October.
- Third Quarter Earnings
Corporate earnings reports have been strong. Most companies exceeded expectations with 56% of reporting companies beating by more than one standard deviation (source Goldman Sachs). But this time, the good news on earnings was met with doubts about forward-looking earnings given slowing global GDP, prospects for a very bumpy Brexit, profit margin sustainability, trade policy, and other factors.
- Ship Wreck or Chip Wreck?
The greatest pain is in the tech sector. High fliers such as Apple, Netflix, Facebook, and others are off over 20% placing those names in bear market territory. Several chip stocks are down in sympathy.
Where are the positives?
- Tradition is on the side of a resumption in the Bull Market: While every Bull Market ends in its own way there is plenty of history to indicate that this Bull Market is not over.
- Earnings have not yet peaked, and even if the current quarter eventually is identified as the peak, roughly 75% of all stock market spikes come more than two years after the earnings peak.
- Stock returns are almost always positive in the year following mid-term elections regardless of the outcome.
- Stock pullbacks coinciding with an expansionary economy are generally later labelled as bull market corrections and are typically not a signal that the bull market has ended.
- Sector Rotation: The tech sector sell off is being accompanied by what appears to be a long overdue rotation to value stocks. As mentioned in our last commentary, heretofore unloved P&G is up 17% since October 11. Apple by contrast is down 20% since October 3. That’s just an example of sector rotation at work.
- Corrections are Common: A 10% correction occurs on average about every 34 weeks. Most people don’t realize that because of a human tendency to repress pain. The thing to remember is to rebalance periodically. Rebalancing coupled with the recognition that sector rotation is also common creates some fresh opportunity in almost every circumstance.
- Interest Rates are Muted: A yield of just over 3% on the 10 year US Treasury note is not all that appealing. Especially given that slowing GDP around the globe translates into diminished likelihood that rates can rise materially.
We could say more in terms of identification of both positives and negatives. But maybe it’s best that we all take a break and just pause to give thanks. We’ve enjoyed a good long run in stocks and those who had the courage to stick with stocks fared exceedingly well relative to more conservative choices. It is especially sweet to think about the number of times that we’ve trimmed stocks in recent years to replenish cash for distribution or for new investments.
Unfortunately new investors have not yet witnessed or enjoyed ongoing stock trimming on market strength. Those newer investors might be going through just their first or second significant market correction. Perspective differs for those who have not yet witnessed the benefits of long term compounding. For all those people we appreciate how difficult living through a correction is. We don’t like it either. Nobody does. But we try to maintain perspective and look for fresh opportunity.
Like we said in our last message on the stock market, we are still bulls, but we spell it with a lower case b.
Best wishes for a joyous Thanksgiving!Some trust products and IRA contributions/balances are not a deposit, not FDIC insured by any federal government agency, not guaranteed by the bank, and may go down in value.