Client Letter 2018 October 30

The markets have been on a downward swing since early October.  I’ve received several calls and emails asking my opinion of what is happening.  The following is my attempt at a summary of the current conditions and what I’m thinking for the future.  Please feel free to contact me directly if you have questions or comments.

Some S&P 500 History

I want to start this note with what I believe is useful, and applicable history.  All market references are to the S&P 500 index, which I use as a baseline for U.S. stock investments.  At the end of January, this year (2018), we had a rapid market correction that took place.  Starting on January 29 and reaching a bottom on February 8 after a fall of almost 11%.  My feeling was that the correction seemed completely disconnected from the fundamentals of the U.S. and global economies, which were in good, to very good shape.  It appeared to me that investors had been wondering how long the current bull market would continue and were waiting for an excuse to get out. At the first signs of market pullback, they felt the time had come and began selling holdings in earnest.  Building on this logic, I described the correction as more emotional than fundamental.  I knew at some point the bull market would end, but that it would require a fundamental trigger to start the process.  The trigger might be a recession or economic slowdown, inflation becoming more substantial, effects of changing trade policies, a noteworthy geopolitical incident, or something of similar impact.  None of which we saw at the end of January.  My feeling was that the correction would sort itself out once investors realized the fundamentals did not support market behavior.  I never suggested the market would recover to the previous high established on January 26, but I suspected the market to settle somewhere higher than the low established on February 8.  Markets were quite volatile until the beginning of April when the February 8 low was re-tested, and markets then began the journey to recovery.  By August 24, we reached the previous market high from January 26.

The Latest Correction

After passing the January 26 high in August, the market continued higher until it reached a new peak on September 20.  There was some mild volatility after that until October 4 when the current correction began.  Not unlike what happened in late January, this correction unfolded rapidly, down over 7% by October 11.  The downward direction continued, at a slightly slower pace, to reach the recent low on October 29, down over 10%.  From a portfolio point of view, bonds have acted as a buffer to stocks, though not to the extent we might hope.  In that same period of the S&P 500 being down over 10%, the U.S. aggregate bond index was down about 0.5%.  Not positive, but still much less volatile than the stock index.

I can’t help but compare this correction to what happened earlier this year, given that none of the fundamental triggers have been seen in our economy.  No event, or economic report, supports the rapid market response we’ve seen.  And not unlike late January, I feel investors are still wondering when the bull market will end and when to get out of the market.  And again, once the selling starts, those on the fence jump-in to sell in earnest.  My takeaway on this correction is also similar to my thoughts from late January.  Yes, this bull market will end, but the fundamentals suggest it is not happening now.  Further, I don’t believe (and history has shown) that bull markets don’t end with a rapid correction that triggers a bear market.  Rather, bull markets run out of steam as economic fundamentals show weakness, starting a more gradual downward move that evolves into a bear market.  Much harder to recognize.  Markets usually don’t give large, rapid price adjustments as indicators of a changing market environment.

Again, I am not predicting that this correction will lead us right back to the recent market high from September 20.  Perhaps the market was over-valued, and some adjustment is justified.  My guess is that this volatile market will continue up through the mid-term election on November 6.  From there, it’s anyone’s guess where the markets will go.  Because the election results will play a significant role, at least in the short-term, in the market’s response.  Looking ahead, I suspect that without seeing the fundamental trigger I’ve mentioned, we’ll end up somewhere above whatever market low we hit in this correction.  So, for those wondering what to do, I suggest we sit tight for now.  The late January correction took over six months to recover fully, and six months isn’t a long time for most investors.  Further, investor reaction to the mid-term elections could be positive, meaning a recovery could happen much quicker.  Without a strong change in the fundamentals, and with a large unknown such as the election, my feeling is that it is best to not make rash decisions and hold tight.  We can make better informed decisions once we get past the elections.

If you would like to discuss these items (or any others) and how they might affect your portfolio, please call our office.  We can schedule an appointment or just chat on the phone.  In the meantime, I will continue to watch the global economy and make investment choices to the best of my ability for each and every client portfolio.

Best Regards,

Jim Thibault

Managing Partner

Barron Financial Group, LLP is a fee-only Registered Investment Advisor regulated by the Connecticut Department of Banking.

This newsletter is for general information only and should not be considered investment advice.  Investors should consult with a trained investment professional to discuss their particular situation.