October 11, 2018 – Market Update

The S&P 500 has now pulled back about 7.2% from its recent peak. What’s happening? Our take is that markets have been coping with several macroeconomic overhangs (Italy, US-China trade, rising interest rates, and wage inflation) for weeks. But, corporate earnings reports had been strong enough to assuage concerns for quite a while.

Recently, however, concerns have been surfacing due to a few recent profit warnings and underwhelming reports. Wednesday’s sell-off was most pronounced in tech stocks, which had seen the greatest run-up this year among sectors. Today, financials and energy stocks saw the most damage.

When an asset class like stocks fall significantly, it can be viewed as going ‘on sale’. The P/E ratio (a barometer of how expensive or cheap stocks are) as of a few weeks ago was nearly 17x forward earnings – a little higher than the 25-year average of 16x. After the recent selloff, stocks are now trading at 15x – or what many consider “cheap.” That’s not an uncomfortable place to be historically.

What might this mean for investors?

Wednesday’s 831 point drop on the Dow was the third largest point drop of the year. Today it fell another 545 points. It has been a few months since such a big decline so it may have felt more “shocking.” Historically speaking, it surely wasn’t an unusual event.

We believe strongly that maintaining discipline in the face of fear often results in better returns in the long run. Rather than viewing these periods as threats, we try to see them as opportunities. To put it bluntly, every single broad market decline of the last 200 years has later been viewable as an opportunity. This one, while young, doesn’t have a known expiration date but it does have an expiration date nonetheless.

We are reviewing client portfolios regularly and will be buying (low) should portfolios get outside of their asset allocation ranges. Importantly, this month’s movements have not been significant enough by themselves to take portfolios generally out of balance.

While turbulence in the market is never enjoyable, we encourage investors to look at the silver linings and take advantage of what they can control. Don’t try to time the market – stay balanced, and keep the plane steady.