Stocks continue to have a bad week.
From 10/03/2018 to 12/20/2018 the SPX (S&P 500 Index) is down over 15%.
The NASDAQ is down over 18%.
Investors are worried about interest rates going up and that the economy may not grow as fast next year. There is also political drama with trade and the risk of a government shutdown.
We believe this is all rooted in speculation and these kind of sell-offs do happen.
In my opinion, this is a similar situation to 1987, but less intense. Some similar factors below:
• New Fed chairman
• Rising interest rate environment
• Potential inflation
• A strong US Dollar
In 1987 the stock market sold-off, but we didn’t enter a recession. In fact, we had a 27% rally in stocks after the sell-off (10/19/1987 to 10/19/1988).
A stat from today is that 38% of stocks on the Nasdaq and NYSE fell below their 52-week lows.
We believe this is fear selling, not a fundamental rationale for lower valuations.
Historically, when at least 35% of stocks made new 52-week lows, the market (S&P 500) rose on average 3.8% the next week and 3% the next month.
We believe we are at or near the bottom of the market and that most of sell-off has already occurred.
The economy is still strong:
• 2018 has been the strongest year for the economy since the financial crisis 10 years ago
• Unemployment remains near its 49-year low
• Wages for workers are increasing
• “The strong economy is benefiting many Americans.” – Powell
We believe that the painful sell-off in stocks is near the bottom. However, corporate earnings and further trade talks may be the stabilizing factor in early 2019.
Here is what we’ve done in case we see some further volatility:
We have reduced positions in riskier assets like growth stocks and business loans.
We have increased positions in safe havens and quality like cash equivalents and highly rated muni bonds.
We believe taking money out of the market now is selling near or at the bottom.
It’s the time to start thinking about what looks cheap in the market and what opportunities are going to present themselves in the coming months.
General Disclosure & Supplement:
The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person. Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Forecasts or projections of investment outcomes in investment plans are estimates only, based upon numerous assumptions about future capital markets returns and economic factors. As estimates, they are imprecise and hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time.
The S&P 500 index is down over 15% from 10/3/2018 – 12/20/2018 using Bloomberg Terminal’s screen for the SPX Index. The Nasdaq is down over 18% for the same date range gathered from the Bloomberg Terminal’s analysis. The stock market is in reference to the S&P 500 index. Volatility is in reference to the CBOE VIX index. An index is unmanaged, does not reflect management or trading fees, and one cannot invest directly in an index. The economic backdrop for October 1987’s “Black Friday” market crash (interest rates and inflation data were gathered from the Bureau of Labor Statistics “BLS” and the St. Louis Federal Reserve Economic Data “FRED” which both showed increasing trend from roughly January 1987 to April 1989). The Federal Reserve Chairman Allen Greenspan having just come into the position and the strength of the U.S. dollar was gathered from the Investopedia article titled “What caused Black Monday: The stock market crash of 1987?” by Troy Segal. The SPX Index from 10/19/1987 – 10/19/1988 had a total return of roughly 27% as referenced by Bloomberg Terminal’s analysis. The statistics of 38% of equities on the Nasdaq and New York Stock Exchange trading below their 52-week lows and that when 35% of stocks on the Nasdaq and New York Stock Exchange make new 52-week lows, the S&P 500 index rose on average 3.8% the next week and 3% the next month were all gathered from the Bloomberg article “Shades of 2008 and Crash of 1987 in NYSE List of Crushed Stocks” by Elena Popina. Statements of 2018 being one of the strongest years since the financial crisis, wagers for workers increasing, and the quote of the Chairman of the Federal Reserve Jerome Powell stating that “the strong economy is benefiting many Americans” were in reference to the transcript of Chairman Powell’s FOMC Press Conference on 12/19/2018. Unemployment rate statistic was in reference to the Barron’s article, “Delta Air Lines, Procter & Gamble and 6 More Stocks Making Moves Thursday Morning” by Ben Levisohn. Statements about the market(s) being near or at the bottom are statements of opinion. Statements about cash equivalents and municipal bonds being safe havens are statements of opinion. Statements about having a long time horizon when investing in order to make money were statements of opinion and not a guarantee.