Written by: Michael Joyce, CFA, CFP®
You may have noticed news over the past couple of weeks that all major stock market indices have neared “correction” territory (that is, they are down 10% or more from their recent peak). Recent news also reported that approximately half of the stocks in the S&P 500 index are in “bear market” territory (more market lingo – this one meaning down 20% or more from the recent peak). So, what’s causing the fall and should you be concerned?
To answer the first, we would name several factors, including trade concerns between the U.S. and China, the potential partial shut-down of the U.S. government, and the uncertainty around the Federal Reserve’s policy with regards to increasing interest rates. The story about China is a complicated one, but one thing is sure – the “trade war” that has been recently engaged in by the U.S. and China is hampering economic growth on both sides. The potential government shutdown centers around funding for the border wall desired by President Trump, but few other details about it are clear. A variety of solutions have been proposed, but communication seems to be lacking between both parties as well as the White House. What happens before Friday is anyone’s guess.
In regards to the Fed, they have found themselves in another dilemma. Their rate hike path is largely believed to include another increase in December, but the Fed Chairman has recently indicated rates may be reaching “neutral,” putting hikes beyond December in question. The December hike is already “priced into” the market (i.e., investors are expecting it, and it is already reflected in the prices of various investments), so the commentary the Fed publicly releases after their upcoming meeting will be more determinative of market direction. Suggesting additional rate increases may cause the market to fall further, since businesses tend to cut spending as rates increase, leading to lower earnings and, therefore, lower stock prices. But, if the Fed suggests they may slow down their rate increases, they will be signaling that they see weakness in the economy, which will also likely push the markets down further.
The commonality between these factors is uncertainty, and if there is one thing the stock market doesn’t like, it’s uncertainty.
The answer to the second question – should you be concerned? – is easier. No. Above all, we focus on long-term investing. Given such, no market correction or even recession is something to panic about.
Beyond our long-term focus, thinking about macro specifics of the current environment, we do not believe that there will be an imminent slip into bear market territory for the entire market. It is possible the correction is not yet over, but we don’t see this as the beginning of a prolonged bear market. Nor do we believe that it is time to get defensive yet. We have been pruning certain stock positions over the past year as companies have become fully valued, but this has been on a case-by-case basis. In general, we will move to position entire portfolios more defensively at some point, but that time has not arrived yet. As a historical example, this period reminds us of 1998, when a rather large correction hit the market in July and continued through August. However, the full bear market did not begin until over a year later – in early 2000. Could things happen differently this time? Certainly. So we’re watching market factors closely and have a plan for defensive positioning when the time comes.
Our method for investing clients’ assets is always driven by their unique objectives, long term in nature, and supported by a prudent investment strategy. We always remain focused on the long term and do not let short-term market conditions influence or dictate behavior. Our investment philosophy centers on a globally diversified approach to achieving attractive upside participation in rising markets, while preserving capital in the event markets display substantial weakness.
If you are concerned about anything transpiring in the public markets, please contact your financial strategist, as we are always here to discuss our investment strategy in more detail.