Given all the eye-grabbing market related headlines of late, we would like to share some thoughts from the Withum Wealth Management team regarding the volatility this fall. If you have any questions related to your investment portfolio or wealth plan, please do not hesitate to reach out directly to a member of the Withum Wealth team or your tax advisor who can connect you with the appropriate professional.
1. Is this volatility normal? Yes and no.
Recent market gyrations have been some of the most extreme, both positive and negative, since the US Debt downgrade in 2011 and the great financial crisis of 2008.
However, historically speaking, the amount of days with at least a 2% move, up or down, is on par with 2015, 2011, 2010 and 2009 – all years where the bull market did not end. The headlines are quick to point out “Dow Drops 500 points in Turbulent Market” however, 500 or 1000-point swings aren’t what they were back in 1987. A 250-point move on the Dow Jones is only about 1%.
Corrections, while painful and sometimes heart-stopping, are part of a normal cycle and average around a 13% decline from the highs of the market while typically lasting less than 9 months. Bear Markets are more prolonged downturns, generally 9-18months and require a drop of more than 20% from a market peak. Corrections can occur for any or no reason at all while bear markets tend to be more fundamentally driven by economic recessions and a reduction in corporate profits (not just a slowdown of growth), monetary or fiscal policy error, or overly jubilant investor sentiment.
2. What is causing this volatility?
There’s really nothing we haven’t heard or talked about before causing this volatility. Trade war fears with China, tightening monetary policy, Muller investigations of Trump & Co. are all issues we’ve heard about. Recently, renewed uncertainty related to tariffs and its potential impact to corporate profits, as well as a meaningful slowdown in growth as the Corporate Tax cut “stimulus” fades seemed to resurface during 3Q earnings calls.
Moreover, concerns over faster than needed Federal Reserve tightening and an inverted yield curve – when short term interest rates are higher than longer term interest rates – stoked fears that the once roaring US economy will slow with a recession potentially in the cards in 2019. While it’s true that tighter financial conditions are a headwind, we still think rates are low enough to suggest Federal Reserve policy is not too tight to choke off the economy.
As for the yield curve, for the better part of a week now, the 3yr Treasury yield has been higher than the 5yr Treasury. That part of the yield curve has inverted, however the spread between the 2yr and 10yr Treasuries – a more commonly tracked part of the curve – is still positive. While a flat curve is not great for bank profits, an inversion for a prolonged period would be more worrisome. Furthermore, we would remiss to note that an inverted yield curve is not a perfect indicator of a recession or bear market. It is true that every post-WW2 era recession has been preceded by an inverted yield curve, however there are numerous times where an inversion has not caused a recession. That is exemplified by the fact that markets, on average, tend to rise 29% for 13months after the 2/10yr spread inverts.
3. Should you be worried?
Headlines will always be shocking and are meant to draw in viewers. The negative rhetoric today is not because the world is ending, rather it captures more views or clicks and more ad revenue in the publications’ pockets. Often, markets tend to shrug off the day-to-day headlines, but recently the opposite has occurred, and day-to-day headlines are causing the market to seesaw violently. Many Investors consider this “hypersensitivity” to be temporary and can often provide us with opportunities to invest in the “blue chip” companies with strong business models and stable balance sheets that we like at a discount.
It is ever more important in times like these to ensure your assets are in line with your longer-term goals.
4. What do fundamentals tell us?
Ultimately, not much has changed from a fundamental standpoint in our view. GDP is still expected to come in at 3.5% annualized for the current quarter, unemployment numbers remain strong with ample job openings, wage inflation seems under control at 3.1% annualized growth and forward-looking manufacturing and services numbers remain in expansionary territory. Growth abroad has had its own hurdles recently, but we feel there are pockets of opportunity where value presents itself, namely in the beaten-up Emerging Markets sector, and having foreign exposure is imperative to proper diversification. In our view, recent market action is more similar to that of a correction, rather than the start a bear market.
Risks always exist in the markets and economy and we will continue to analyze these details closely. If you have any questions or concerns with your own financial situation, please do not hesitate to contact us.
About Withum Wealth
Withum Wealth Management brings the resources of a multi-billion dollar registered investment advisory firm to Withum. We offer a range of wealth management solutions that extend beyond the scope of boutique advisors and without the conflicts inherent in many financial institutions.