Considering these drawdowns, how do we keep any semblance of sanguinity? Since the start of October 2018 through yesterday (11/20/18), the S&P500 is down -9%, the Dow Jones is down -7%, the Russel 2000 is down -13% and the Nasdaq is down -14%. Oh yes, and the bond market isn't benefiting an iota from all this stock-market turbulence. Bonds too have declined, albeit just -36bps.
Firstly, let’s remember most of us are in the market for the longer-term and we can sustain some volatility. Then let’s recall why we’re not dumping into the downturn. And finally, let’s explore why this is happening - despite our fair outlook.
Why we’re still positive: The yield curve is a long way from inversion, Unemployment continues to fall, Wage growth is mild but is happening, Personal savings rates have not risen – families are spending their increased wages, Inflation expectations have not changed dramatically, And, forward S&P500 P/E multiples are moderate - in the 15s. Since 1990, seventeen is the average having reached a high of 27 in 1999.
Then why are markets sliding, you ask? Fear a trade war could smack US companies is not unjustified but is presently overhyped. Also, while earnings will grow next year, they will not continue to do so at record highs. Earnings growth averaged an astronomical 20% in 2018. With "just" 10% growth anticipated next year the deceleration is interpreted by jittery investors as negative growth – it’s not. And there are fears - not borne out by data - climbing interest rates are crimping growth.
I’ve spent the last couple of weeks reaching out individually to our wealth management clients analyzing portfolios position-by-position. As I’ve talked over with many of you - the biggest threat to our view is an all-out and escalating trade war. All will be watching for signs of Trump/Xi cordiality at the upcoming G20. More meaningfully, Trump agreeing to pause tariff hikes set for Jan 1 would be an omen he's listening to (most of) his economic advisors.
In the meantime, let's take a pause to remember all we're thankful for. For me, I count you when I count my blessings.
