Those of you who have been diligently consuming our investment commentary would recognize that the current market volatility is not unexpected. Our view has been that US Equities, especially growth and technology stocks, have been overvalued for some time. These are the sectors that have led the current downturn. Two-thirds of the S&P 500’s individual stocks are now either in a “correction” or a bear market. The rest of the world has been down YTD, and there has been no relief in traditional bonds. Stocks don’t go up in a straight line – the 10 – year bull market is tired.
More than 350 companies out of the 500 tracked by the S&P 500 index have lost more than 10 percent of their value since hitting their 52-week highs (Reuters). Within that group around 180 stocks are now in bear market territory, with their shares having lost more than 20 percent of their value.
The chief concern is that U.S. and global economic growth has hit its high-water mark for the current business cycle and is starting to weaken. Most economic forecasters, along with the Federal Reserve, think the hot economy is likely to cool in 2019. Another major factor weighing on stocks is the potential damage from a prolonged U.S. trade war with China.
We are also concerned that interest rate hikes by the Federal Reserve will dampen U.S. economic growth. Indeed, mortgage rates have risen to multi-year highs, and impacted new home sales and prices.
A decline of 15 percent would place the index firmly in correction territory — and approaching bear turf if such a stock slide worsens.
Investment experts recommend riding out a bear market rather than trying to time stock sales and purchases. It is notoriously hard to accurately gauge where the market is headed – indeed, the most bullish bounce-backs for stocks are typically concentrated in just a few days of trading before they become apparent to everybody.
In the current environment we prefer adding to fixed income positions, especially short-duration bonds and floating rate bond and loan funds. We have also been slow to invest new cash, and quick to raise cash where needed in a manner intended to avoid realized losses.
Better to simply ignore the market noise — hard as that can be — and just keep
- Living on your income from interest and dividends if retired or,
- socking away your savings on a steady basis through regular payroll deductions into a company 401(k) or IRA – you are likely buying low.
And as always, we will seek to buy opportunistically, whether stocks or funds, when things appear overdone.