With the fireworks this week in the stock market, I will focus more attention in this quarterly update to the recent volatility opposed to what transpired in the third quarter of 2018. On Wednesday and Thursday, the S&P 500 experienced its largest two day drop in price we have seen in a very long time, down 5.3%. After the amazing tranquility we had in 2017, this week’s action was a reminder that the stock market can be volatile at times. The question likely on investors’ minds is whether more weakness is to be expected. This is a fool’s game to try to predict the near-term direction for stocks, but I will share with you some things I believe are worthy of consideration.
The most frequently blamed culprits for the volatility include the ongoing trade tensions with China, last week’s spike in Treasury bond yields, uncertainty with respect to next month’s mid-term elections, slowing global economic growth, concerns of a plateau in corporate earnings, and the list goes on. Now would probably be a good time to remind investors that the financial markets are notorious for “climbing a wall of worry” – there are always concerns.
My view with respect to these various concerns are as follows:
· With regards to the trade tensions with China, I expected that we would have a deal with China by the November elections. It appears this is not going to happen. I read recently in Barron’s that JP Morgan’s base case for 2019 is now for a full-scale trade war. This would be unfortunate as it could lead to inflation and impact economic growth and corporate profitability. That said, as I noted in my prior quarterly update, we should have more fair trading terms with China.
· With regards to the recent spike in Treasury bond yields, I believe the 36 year bull market in bonds is now officially over. Thankfully, our strategy of focusing on shorter term bonds has so far served us well. Longer term bond prices are more vulnerable to rising bond yields due to the inverse relationship between prices and yields. If yields go up, prices go down and vice versa. Bonds still play a vital role in portfolios of investors needing to moderate volatility. If interest rates continue to rise, I believe it will be time to begin adding a little more duration to bond portfolios (meaning adding bonds with a little more time until maturity). A big concern for stock investors is whether or not bond yields are getting to a level where investors may view bonds as being more attractive than stocks. I continue to believe we are not to this point yet as I noted in my “Bonds vs. Stocks” blog back in April.
· With regards to the election, there is always uncertainty prior to an election. Corporations have found ways to generate profits regardless of the political backdrop in the White House and Congress.
· With regards to concerns about slowing economic growth and a plateau in corporate profits, global manufacturing reports and global labor markets indicate growth is solid. As I have noted previously, I believe next year’s earnings expectations for the S&P 500 to be overly optimistic, and this certainly could slow the advance of stocks. Thankfully, valuations are pretty reasonable, especially following this week’s setback.
For the record, through the end of September the S&P 500 was up 10.6% year to date, the MSCI EAFE index of established foreign economy stocks was down 1.4%, and the MSCI Emerging Market index was down 7.7%. Given the outstanding returns posted last year by foreign stocks, I am not overly concerned about the weakness we have seen thus far in 2018 from this asset class. Some of the weakness can be tied to the U.S. Dollar strengthening again this year. It is encouraging to see that this rise appears to have topped out in August; despite U.S. Treasury yields hitting their highest level in 7 years last week, the USD settled at a lower level than it was back in August.
Based on several technical and sentiment indicators, stocks are very oversold at current levels, at levels that commonly occur around market bottoms. An interesting historical note is that the fourth quarter of the second year of the four year Presidential cycle, and the first and second quarters of the third year of the Presidential cycle are historically the best performing three quarter span of the 16 quarter cycle (Stock Trader’s Almanac). Here’s to hoping history repeats itself.
Glenn S. Rank, CIMA®
Certified Investment Management Analyst®
· GSR Capital Management, Inc. is a Registered Investment Adviser. This market update is solely for informational purposes. Advisory services are only offered to clients or prospective clients where GSR Capital Management and its representatives are properly licensed or exempt from licensure. GSR Capital Management is not a tax advisor. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by GSR Capital Management unless a client service agreement is in place. If you do not wish to receive marketing emails from this sender, please send an email to email@example.com.
· Expressions of opinions are as of this date and are subject to change without notice.
· The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.
· The S&P 500 is an unmanaged index of 500 widely held stocks that’s generally considered representative of the U.S. stock market. The MSCI EAFE index and the MSCI Emerging Markets index are unmanaged indexes compiled by Morgan Stanley Capital International that are generally considered representative of the developed international stock market and emerging international stock market, respectively. International securities involve additional risks including currency fluctuations, differing financial accounting standards, and possible political and economic volatility, and may not be suitable for all investors. Investing in emerging markets can be riskier than investing in well-established foreign markets. Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary.
· Investments & Wealth Institute™ (The Institute) is the owner of the certification marks “CIMA,” and “Certified Investment Management Analyst.” Use of CIMA, and/or Certified Investment Management Analyst signifies that the user has successfully completed The Institute’s initial and ongoing credentialing requirements for investment management professionals.