October Market Scaries
As most of you know, we’ve advocated for many years that you not pay attention to the daily drivel of the financial media but rather focus on more important things like your family and friends. For the hundreds of you who have experienced the benefit of following that advice, read no further but, rather, go back to having a great day!
For those of you who can’t quite tear yourselves away from the financial pornography of CNBC, Bloomberg, and others, you know that this month has been quite volatile. As we write this, we’re down somewhere between 5-10% from the late-September highs. To put that into perspective, we’re hanging around levels on the S&P 500 that we haven’t seen since all the way back in…..July. Which happens to be about where the markets started the year. Toward the end of 2017 we mentioned anticipating this volatility. Since then, we’ve witnessed two sharp downturns. One in late January and now in October. As we previously reminded you, volatility was certain to come back after such a calm 2017 where the market smoothly increased in value. 2017 was NOT the norm!
The good news is that there are no fundamental problems giving us major cause for concern. For example, corporate earnings growth is up over 20% year over year, yet stocks have retreated to essentially the same prices as a year ago. Dividend and stock buybacks are on the rise, we’ve had simplification of the tax code, a drop in U.S. corporate tax rates (from 35% to 21%) and seen massive amounts of investment back into the U.S.
The markets always face the same headwinds year after year. The only difference is the order of importance of said headwind. This year topping the list are rising interest rates, trade wars and the midterm elections. So, lets address each of these to put them into perspective.
Interest rates? Of course interest rates will continue to slowly rise. That cannot possibly come as a surprise to anyone. Other than making bonds the riskiest they’ve been in most of our lifetimes, the rise in rates is an indication of a strengthening economy. The United States has enjoyed tremendous growth periods in the past with rates nearly twice what they are today.
Trade wars? We’re not in favor of tariffs or a trade war, but it appears so far to be a successful negotiating tactic used by our government. Despite the negative tariff headlines, China is actually lowering their tariffs on several imports. Please see the following for more details:
Midterm elections? Every election cycle brings uncertainty and the markets hate uncertainty. Many people believe that the markets will be devastated or flourish depending on which party is in power. While everyone has their political preference, there isn’t a shred of historical evidence to prove the market does. Once markets and companies have their certainty, they simply move on and continue to deploy capital and resources as efficiently as possible for the benefit of their shareholders. All the market cares about is the profitability of the companies that make up the various indexes.
So with regard to temporary declines – which on average see the market fall 14% at some point during each calendar year – they are actually quite healthy for the market. They are as Nick Murray likes to say, “periods of time where stocks are returned to their rightful owners”. We believe equities are cheap and this is a great buying opportunity. If you are fully invested, remain calm and know that you’re well positioned in relation to your planning goals. Investors have always been rewarded for blocking out the short-term noise.
So as we frequently remind you, turn off the TV, enjoy a sunset and soon these October Scaries will go back to being an imaginary monster under the bed!
-Adam M. Lucke, Financial Planner
Rogan & Associates