Research Director Monthly Commentary, November 2018

Not A “Systematic” Correction

 Deep breath……aaahhh. As we’ve stated in the past, market corrections are normal and occur often. Looking back on the last 90 years, on average, corrections occur about once a year (we have been well below this average in the current 9-year bull cycle); the average correction is about 13% in magnitude (we are down about 10%); the average consolidation process following a correction lasts about 3-4 months (we are less than one month past the October 29 low).

We believe the current correction in stocks is due to a combination of factors, but primary among those are a valuation adjustment in tech stocks and concerns over the Federal Reserve getting too aggressive with raising interest rates. Secondarily, but also significant, have been concerns over the U.S. trade dispute with China and federal government policy uncertainty looking into 2019. The bulk of the correction has occurred in a fairly narrow area of the market, primarily the technology and energy sectors, so it does not appear “systematic”. Many sectors have held up well and the fact that the correction is fairly narrow in scope, at least up to now, is quite possibly a signal that this pullback is not something more serious. We also believe much of the selling is institutionally driven (hedge funds, bank trading desks, and computer-driven trading) which can  add significantly to intraday volatility. Algorithmic (computer-driven) trading is detached from fundamental investing and has led to greater market volatility.

As of now, the stock market as measured by the S&P500 is down about 10% from the September 20 all-time high, well within the bounds of a normal correction (a correction is defined as a pullback of 10-20%). We would not be at all surprised to see the market re-test the 2550 February and April lows, or even go a bit lower. This would be a normal technical re-test in a bottoming process. That said, we cannot, nor can anyone for that matter, forecast what the market will do in the short term. You will recall that we did take some steps to de-risk portfolios following our September 27 investment strategy meeting due to concerns primarily with tech stock valuations. We remain positive on the longer-term outlook for U.S. stocks, although we expect market volatility could remain elevated for a while longer. Looking into 2019, we believe the U.S. economy should remain healthy, corporate profits should grow in the range of 5-8%, inflation should remain moderate at around 2-2.3%%, and the Fed should move to a less hawkish stance on interest rates. One concern is the outcome of the trade dispute with China. We should have greater clarity on that after the G-20 summit in two weeks.

So what does this have to do with financial planning? Financial planning helps mitigate risk in a number of ways. It helps people identify and address personal financial risks. It helps people organize and better define their finances and financial goals. It also helps set an appropriate investment strategy. An appropriate investment strategy, which includes an appropriate allocation across several asset classes, helps to mitigate volatility and has shown to improve risk-adjusted returns. An example of how diversification benefits your portfolios is, over the past two months while the S&P500 is down about 10%, your short and intermediate term bond holdings have barely budged in price. Investment allocations should be set within the discipline of a financial plan in a rational and non-emotional way. Making sure your financial plan is up to date and re-balancing your portfolio to an appropriate allocation will go a long way towards helping to reduce risk and allowing one to sleep better during inevitable bouts of market volatility.

From all of us at S. R. Schill, have a very happy Thanksgiving !

Bob Toomey, CFA/CFP

Vice President, Research