Monthly Markets Memo - November 2018
by Dan Zalipski, CFA
It goes without saying that the recent volatility has been unsettling as investors have watched 2018 gains evaporate amid the turmoil. It’s times like these where we must remind ourselves that corrections are a routine occurrence and not necessarily a sign of an imminent prolonged downturn. Corrections, defined as a 10% drop from the most recent peak occur on average once a year. Smaller market declines between 5-10% are even more frequent averaging about four per year. Compared to recessions, they are relatively short in duration, but can still linger for several months. Trying to time moves within a portfolio in anticipation of a correction is difficult due to their frequency and somewhat unpredictable nature. Coming out of a correction, however, is a prudent time to assess the correction’s impact on a portfolio and rebalance appropriately.
Corrections are commonly rooted in emotional reactions near new market highs, whereas recessions are a more severe downturn in economic activity, marked by two consecutive quarters of negative GDP (Gross Domestic Product) growth. Currently U.S. GDP growth is positive, and other areas of the economy remain strong. Both the manufacturing and service sectors continue to expand based on the latest reading from the Institute of Supply Management. Unemployment and inflation remain low. There are some areas of concern, such as the 30% drop in oil prices over the past eight weeks. That decline is attributed to oversupply rather than weakening demand, and lower oil prices tend to benefit individuals and corporations alike. The housing sector is also under pressure. Buyers are finding homes too expensive in addition to facing higher borrowing costs as interest rates rise. Corporations are also beginning to voice their concern regarding higher borrowing costs and the impacts of current trade policy, the two main drivers of the recent market volatility.
The 10% tariffs on $200 billion worth of Chinese imports is set to increase to 25% on January 1st. Tariffs are essentially a tax on the consumer as the increased costs work their way through supply chains. Thus far, companies have generally absorbed these increases at the expense of their profit margins. At some point, they will have to raise prices, passing these increases to the consumer. Concerned investors are watching for companies’ profit margins to compress or for higher prices to have a chilling effect on economic activity. There has been some speculation that a deal could be struck at the upcoming G20 conference this week, a deal that could potentially bring some relief to producers, consumers, and investors alike.
The other source of concern, and volatility within the markets is rising interest rates. In an early October speech, Federal Reserve Chairman Jerome Powell indicated that interest rates are still a long way away from neutral, the point where it is believed interest rates will neither boost or slow an economy. Investors interpreted this as a commitment to follow through on the December rate increase, and the 3 forecasted rate increases in 2019 with the potential to add more. As rates rise, companies and consumers face higher borrowing costs with the potential to slow economic activity. While the December rate hike is all but expected at this point, recent speeches by other Fed Governors are hinting that the 2019 rate increase could be put on hold giving the economy and markets a little breathing room.
The market volatility is tied closely to anxiety around current trade and monetary policy. It is not directly attributed to dramatically weakening fundamental drivers of the economy associated with recessions. We do not believe the current market action is an imminent sign of a prolonged downturn but are carefully watching for signs and changes in the economic backdrop. The team at Vantage remains committed to a disciplined investment approach, continues to monitor for new and ongoing developments, and adjust for their potential impacts. Should you have any questions, please do not hesitate to reach out to your Relationship Manager.
"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. Although general strategies and / or opinions are revealed, this post is not intended to, nor does it represent or reflect, transactions or activity specific to any one account. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All data and information is gathered from sources believed to be reliable and is not warranted to be correct, complete or accurate. Investments carry risk of loss including loss of principal. Past performance is never a guarantee of future results.