Don't Panic, This Is NormaL
No way to sugar coat it. It’s been a brutal October, one of the worst on record. It took the stock market 9 months to climb 11% and less than 20 trading days to give it all back. Why? To truly understand the reason you would have to get inside the head of every investor who decided that now is the time to sell. Stocks always fall faster than they rise…fear is more powerful than greed. As I mentioned a couple weeks ago (A Long Way From Neutral), I believe the combination of rising interest rates (which make things we finance more expensive), the trade tensions (including tariffs, which are essentially taxes), along with comments from the Federal Reserve Bank, are the likely reasons for this pullback.
source: Bespoke Research (Charting the Selloff)
Stocks don’t climb higher indefinitely. Pullbacks of 10% or more, are normal, and healthy. They rid the market of excess exuberance. Recall that the stock market is a tradeoff in which we accept short term, temporary volatility, to attain permanent, long term gains…gains that are historically 2 to 3 times more than what the bank provides. Falling stocks are a normal part of this process. For perspective, see the graph below from AllStarCharts:
All Star Charts - Falling Stock Prices are Normal
Technology, as I mentioned in my last newsletter (Long Way from Neutral), is the worst performing sector, as expected:
Spotify, -26% (% down from recent high price)
Netflix, -29%
Tesla, -15%
Apple, -7%
Amazon, -20%
Facebook, -33%
Google, -15%
source: Morningstar.com
I’ve made the case most of the year that technology stocks were overheated (Big Tech, the New Big Tobacco). I’m not concerned about the long-term viability of the companies, but I believe the stocks were vulnerable as they’ve run up so high over the past few years. Investors have piled into these names as this is where growth is abundant. I believe we’re experiencing a normal correction, and nothing more sinister. The market is adjusting for higher interest rates, and slower economic growth globally. But I don’t see a recession on the immediate horizon. Historically we see layoffs and higher unemployment leading into recession, which we don’t see today.
“…the threat of tariffs may have helped the President with his trade negotiations, but it is creating uncertainty in the US economy. It is also putting upward pressure on prices, some of which is already impacting consumers…”
Nicholas Colas
(DataTrek, 10/24/2018)
As the market has dropped precipitously over the past month, here are how some non-tech related investments (some would say ‘boring’) have performed:
Proctor & Gamble, +5.5%
Vanguard Utilities, +3.2%
Vanguard Consumer Staples, -.5%
Gold, +3.3%
Japanese Yen, +.8%
source: CNBC
This is precisely why we diversify. The rotation away from tech to more value oriented (high dividend) investments appear underway. The midterm elections may provide more volatility, and attractive (lower) prices…opportunities may be at hand, stay tuned.
Thank you,
randy
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