Market Update

As you’re probably aware, stocks are having an awful fourth quarter. Since hitting a peak on Sept. 28th, stock prices broadly are down over 15% with some corners of the market, such as growth companies and small companies, declining the most. The US small cap stock index, Russell 2000, is now officially in a bear market, down 21% this quarter. The NASDAQ index of technology stocks is down 19%. The S&P 500 appears to be headed to its first down year since 2008, following 9 straight calendar years of increases. Stock prices are back to levels last seen in fall 2017.

Stocks reacted very negatively to the Fed’s announcement on Wednesday of the fourth 0.25% interest rate hike this year. The Fed and most economists are not predicting a recession in 2019. US GDP grew 3.5% in the third quarter and is forecast to grow 2% in 2019. It’s reassuring that the Fed believes the economy’s fundamentals are strong enough to handle further interest rate hikes. The unemployment rate is forecast to hit 3.2% in 2019, the lowest level since 1953. Inflation is expected to remain around 2%. It’s worth noting that in late 2015/early 2016 we had a very similar stock market decline (S&P 500 dropped -15.1%) that didn’t lead to an economic downturn. In fact, stocks turned around sharply and returned to the previous highs in a matter of months.

We recommend staying the course and controlling the things we can control. We’re realizing losses in client taxable accounts to gain a tax benefit this year. For many clients, we will be rebalancing by selling bonds and buying stocks on sale. High-quality bonds have been stable, doing what we’ve expected them to do in this environment. Stocks could go lower but nobody credible is expecting anything close to a 2008-like decline. On the bright side, banks are in a much healthier position now compared with 10 years ago so the risk of a financial crisis is significantly lower. US company earnings have increased 28% this year and are expected to grow another 8% next year. US stocks now offer an attractive earnings yield of 7%, up from 5.5% last year.

The famous value investor, Benjamin Graham, once said about short-term stock price swings, “In the short run, the market is a voting machine but in the long run it is a weighing machine.” Changes in stock prices from one minute to the next don’t make much sense to us as they reflect the emotional attitudes of traders who quickly absorb news and react to the reactions of others (often with leverage and other people’s money). We think stock market declines create an opportunity to buy good businesses at a discount.
 
If you have any questions and want to speak with one of our financial advisors, please don’t hesitate to call us at 714-738-0220.

Eclectic Associates