What has happened? On Monday, the S&P 500 Index declined 2.1%, following a 1.9% slide on Friday, bringing it down 13.0% from its all-time high in late September. International equity markets have declined as well during the same time period, but to a lesser extent relative to U.S. markets. International developed and emerging markets have fallen by 11% and 7%, respectively since late September. Not everything has declined since late September. U.S. investment grade bonds gained 1.5%, and emerging market bonds have held their ground (approx. flat) since September.
What should you do? Stick to your plan and try to ignore the noise. Your investment plan was designed to support your individual financial plan and personal goals, time horizons, and risk profile. The financial media speaks to the masses and usually exaggerates the extent of the “bad news” to generate revenue (viewers and/or clicks). We do not think it is wise to sell investments that are down in value but have good long-term prospects and a well-considered role in your personal strategy. In fact, we know from experience that clients who stay the course and do not sell their investments during periods of market stress are generally better off in the long run.
We recognize that volatility has been high for several reasons and, although markets closed higher on Tuesday in the U.S., this volatility may continue in the coming days. We believe there are three key contributors to the recent market skittishness:
- Increased concern about the Federal Reserve’s interest rate hikes especially ahead of its announcement today.
- Recent rate increases and higher bond yields have raised concerns about the effect of higher borrowing costs on consumer and business activity.
- The chorus of advocates calling for the Federal Reserve to pause its current rate hike cycle has grown significantly. Most recently, hedge fund manager Stanley Druckenmiller and former Fed Governor Kevin Warsh published a WSJ article on the topic, citing decelerating growth and the ripple effect of the trade skirmishes.
- A market repricing of European and Chinese economic growth
- Industrial and manufacturing data released on Friday showed signs that growth in China and Europe may be slowing more quickly than previously anticipated, bringing back fears that the global economy may be slowing faster than previously expected.
- Chinese businesses have been negatively affected by trade uncertainty, which was reflected in its manufacturing data.
- 2019 corporate earnings estimates in the U.S. have been revised downward by some analysts.
- Estimated 2019 U.S. corporate earnings numbers were revised down by about 4%, implying a lower growth rate in corporate earnings from 2018.
We also believe that there are positive developments that are not garnering much media attention and seem to be forgotten by investors.
(1) The U.S. consumer remains in good shape.
- Consumer sentiment remains high (chart on the left below), and the retail sales numbers reported last week showed that consumers are continuing to spend more than expected (chart on the right below).
- Consumer spending accounts for 67% of U.S. economic activity and can provide a significant tailwind for corporate earnings and the overall economy.
(2) The Fed Remains Less Restrictive.
- While it still seems likely that Fed Chairman Jerome Powell will announce a quarter percentage point rate hike tomorrow (12/19), we expect the language in his press conference to signal a pause in continued hikes.
- In our view, this scenario would be good for stocks because it signals that the Fed is still positive about the global economy but lessens the chances of a “Fed policy error” in hiking too quickly.
(3) There has been progress between U.S. and China regarding a path forward on trade negotiations.
- The two sides recently announced a 90-day cease fire (i.e., no additional tariffs for 90 days), and China reduced its automobile tariff from 40% to 15%.
- It seems to us that both sides are willing to work together to come to a compromise.
- Further, while China’s economy has shown some signs of slowing down, the government is performing stimulative measures to provide a jolt to business and consumer spending.
When market sentiment is low, and fear is widespread, it tends to be the worst time to sell.
While risks certainly do exist, outcomes are primarily driven by the decisions you make that are focused on the long run. The most important advice we have for you is, unless something has changed in your financial life, try to keep the market volatility in perspective. Remind yourself that the investment strategy you have in place is most appropriate for you because it is aligned with your personal investor profile (risk tolerance and return objectives), time horizon, and financial goals. Volatility is to be expected with investing and predicting short-term market fluctuations or timing the markets is not something most people can do successfully on a regular basis. While we cannot say how long it will take for some of the uncertainty that is roiling markets to pass, we know that it will indeed pass, and markets will likely revert back to their long-term performance norm.
If at any time you would like to talk to us about this matter or anything else, please reach out to us directly at 484-342-4400.
The information contained in this report has been obtained from sources we believe to be reliable but cannot be guaranteed. Any projections, market outlooks or estimates in this letter are forward-looking statements and are based upon certain assumptions. Other events which were not taken into account may occur and may significantly impact our opinion. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice. Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product or any non-investment related content, made reference to directly or indirectly in this communication will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. You should not assume that any discussion or information contained in this communication serves as the receipt of, or as a substitute for, personalized investment advice from Sage Financial Group. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Sage Financial Group is neither a law firm nor a certified public accounting firm and no portion of this communication should be construed as legal or accounting advice. A copy of the Sage Financial Group’s current written disclosure statement discussing our advisory services and fees is available for review upon request.
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