Special Market Communiqué

As we certainly all have noticed, today is the second day of significant volatility and losses in the stock markets around the world.  Yesterday U.S. markets suffered significant losses, with the Dow Jones Industrial Average down 3.1%, the S&P 500 down 3.3%, and the tech-heavy NASDAQ down 4.1%.  At today’s closing prices, the Dow and S&P 500 closed down an additional 2.1%, and the Nasdaq was off 1.3%.  The Nasdaq is now in correction territory, generally defined as a decline of 10% or more from its last high, although it is still approximately 425 points higher than its close at the end of 2017. 

During trying market times, it is useful to reflect on the underlying economic position of the U.S.  The most recently revised GDP growth numbers for the second calendar quarter came in at 4.2%, a major improvement over the more recent growth rates in the 2% range (first quarter growth was 2.2% this year).  Unemployment is at a historic low at 3.7%, the lowest level in 49 years and aggregate expected earnings growth rates for S&P 500 stocks are in the 20+% range.  Consumer confidence was at its highest point in 20 years at the beginning of October, although if measured today certainly would lose points as a result of the difficult stock market.  Virtually all major forecasters expect to see the current expansion run for a while longer with some forecasters predicting another 2 years.  However, there are some clouds on the horizon.  These clouds all seem to be coming together this week to drive down stock prices. 

So what are the major dark clouds?  The Fed is in the process of raising interest rates which will result in higher borrowing rates for corporations and individuals that often restrict growth and dampen stock values.  With long-term home mortgage rates approaching 5%, although very low from a long-term historical standpoint, compared the extraordinarily low rates these past several years the higher current rates might be expected to adversely affect home sales.  It is moderately ironic that one major reason the Fed is raising rates is their estimate that the economy is doing well and can absorb increases in the extraordinarily low rates we have experienced since 2008 market crash.  Secondly, there is a justifiable concern that the continuing trade war with China will depress economic growth in China spill over into global markets.Today’s Wall Street Journal noted that “The White House is moving ahead with plans for President Trump to meet with Chinese leader Xi Jinping… according to officials in both nations, to devise a way out of the trade battle…”  Third, there also is a justifiable concern that much of the current economic expansion is being driven by the recent tax cuts and financed by deficit financing which can fuel inflation.

Neither we nor anyone else can predict the day-to-day swings in the stock market and all of the available data show that market timing remains a loser’s game, so our advice to our friends and clients remains unchanged:  keep your eyes on your long-term objectives and hold a diversified portfolio that is appropriate for your risk tolerance.That was our advice to clients when the Dow hit 6,700 in 2009 and it is the same now that the Dow is hovering in the 25,000 range.

We do not know what tomorrow or next week will bring.  We do know that your portfolio is  well diversified and in-line with your Investment Policy Statement which was drafted with your tolerance for market risk in mind.  Trying to “sell out” of a falling market only to wait and buy back in “when things are better” is virtually impossible to time.  So try to remember that your portfolio was not designed for tomorrow, it was designed to meet your long-term objectives.  There have and will continue to be bad days and weeks just as there will be good days and weeks.