“The true investor welcomes volatility… a wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses.”
- Warren Buffett
Valued Client,
If you think midterm election years would be more prone to market volatility, then you’d be right. Once again, election year uncertainty seems to translate directly into higher volatility. The silver lining for investors is that after such bouts of volatility, markets tend to rebound strongly in subsequent months. (Capital Ideas)
It’s my view that a correction is no reason to exit the stock market. Severe intra-year corrections do not necessarily indicate subpar performance for the calendar year. Historically, stock market corrections or a drop of 10% or greater for the S&P 500 index are normal. In fact, they have occurred on average, once every 357 days. (Scott Wren,Wells Fargo)
For most of you reading this newsletter, we have been through more trying times than a 10% correction. We need to put this October’s market correction in the proper perspective. From April 2nd to September 20th, when the S&P 500 index closed at its all time record high, the index jumped almost 14% higher with hardly any pauses or major pullbacks along the way.
We view the recent weakness as part of the market’s transition from reflecting a low growth/low rate environment to a higher growth/higher rate environment and as a correction within a bull market, rather than an end to the current cycle or to this bull market.
The market is currently fixated on two concerns-China trade and Growth, along with the potential for indiscriminate Federal Reserve (Fed) rate hikes. Fundamentally, we see the economy as being a long way from recession, but the markets are adjusting and repricing a number of key items.
Earnings
Overall growth in earnings is expected to be above 20% in 2018. (Fact set)The original estimate was 11% a year ago. Analysts are expecting 10% earnings growth in 2019. (FACT SET) Could analysts be underestimating earnings for 2019? Full year earnings estimates on the S&P 500 (per S&P 500 share) for 2019 stand at $178 a share and that is up from $161 in earnings for 2018. (Fact set)
Economy:
“The Fed’s underlying attitude is friendly-not hostile- towards economic growth and the stock market. Notably, every recession and bear market over the past 50 years has been preceded by high real interest rates, which we simply do not have or anticipate. (Craig Drill Via RJ Morning Track) GDP in the third quarter hit 3.5% and the real economy grew at a 3.1% pace in the past year, a roughly 50% acceleration from the 2.1% growth rate from mid-2009 through early 2017. We expect an average growth rate of 3% GD for both 2018 and 2019. More growth, in turn, means higher profits, which should help send the stock market higher as well. (First Trust)
Trade War:
Trade war/Tariff concerns are a possibility. The final months of 2018 are setting up to be negative catalysts that produce continued escalation on the U.S.-China trade dispute.Aides to President Trump are reportedly working to confirm a meeting with China's President Xi at the end of November, but a lack of a concrete trade remedy proposal from China is likely to lead to U.S. escalation in the form of an additional tariff package covering the rest of China's imports to the U.S. President Trump's negotiating team appears to be focusing more attention to establishing trade deals with partner nations that would ''ring fence''China, making it likely that the trade fight will last well into 2019 and increasingly we are having conversations about a years-long ''cold war'' on trade with China.(Raymond James, Washington Policy Report)
As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor. I’m here to assist you and to answer any questions you might have in regards to financial planning, the markets or walk through any issue that concerns you. As always, thank you for the relationship and trust.
Harry S. Williamson, WMS
Vice President, Investments
Financial Advisor
Views expressed are not necessarily those of Raymond James & Associates and are subject to change without notice. Information contained herein was reecieved from sources believed to be reliable, but accuracy is not guaranteed. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommenation or a solicitation to buy or sell any security. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success.
The S&P 500 is an unmanaged index of 500 widely held stocks. It is not possible to invest directly in an index. Gross Domestic Product (GDP) is the annual market value of all goods and services produced domestically by the US.
