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Gobbled Up

By Jon Aldrich

Just like the turkey at your Thanksgiving Dinner, any gains that the S & P 500 had for the year have been gobbled up by the ongoing market correction that has lingered throughout October and November.

The volatility in the markets we have been expecting and are now experiencing after such a placid 2017 has arrived, as there has now been a couple of 10% corrections during the year in the S & P 500. After 9 straight years of the S & P 500 being basically positive, 2018 is inching towards breaking that streak. The market has never had 10 straight positive years. Will December save us this year with a “Santa Claus” rally?

It has been a trying year for virtually all asset classes that comprise a globally diversified portfolio as you can see in the chart below through November 20:

Asset Class Chart

Bonds have had a trying year due to rising interest rates, International and emerging markets have had difficult years due to a multitude of factors and Real Estate and Commodities have also struggled. It is a gentle nudge to all of us that participate in the markets that reminds us, yes markets generally go up in the majority of calendar years, but there are years interspersed in there where they don’t; 2018 is turning out to be one of those years.

So where are we in the markets currently? Are we headed for another big crash like the fear selling newspapers and talking heads on TV are saying? Or is this another normal market correction?

True, we have been heading into a higher volatility environment that we knew was coming, but that does not mean that markets are going to crash. It probably does mean, though, that market gains are going to be tougher to come by for the foreseeable future. It is just a transition that we will have to get used to as investors. I have been talking about this for the last year and half and it seems to finally be here.

So, what is causing the markets indigestion lately? You can probably blame any or all of the following:

·         Worries about trade wars with China.

·         Concerns that the Fed will raise rates too far causing the next recession.

·         The FAANG stocks hitting an air pocket (FAANG = Facebook, Amazon, Apple, Netflix, Google) after phenomenal gains the last couple of years that have been responsible for much of the gains in the market indexes.

·         Worries of a slowdown overseas, as Germany and Japan have reported slowing economic numbers.

·         Some signs of a slowing U.S. economy (i.e. housing starts).

However, some of these things could turn around on a dime. If Trump announces a trade deal with China, or if Jerome Powell and the Federal Reserve decide to hold off on raising interest rates for a couple of months markets would likely rally sharply.

Since there has also only been minor signs of stress in the credit markets, the current correction has many of the leanings of your “garden variety” correction and not a sequel of 2008. True, we will want to keep an eye on the credit markets to monitor increasing signs of stress that could signal bigger economic issues, but that does not appear to be the case currently.

As investors we should focus on the bigger picture. Often, during market corrections, markets like to “retest the lows after there has been a rally. That may be what the markets are doing currently. For perspective on this, look at the chart below of the S & P 500 over the last 5 years on a weekly basis. Look back to 2014 and 2015 where markets went sideways for about a year and a half and “retested” the lows a couple of times (yellow line). Now, look at where we are in 2018 and note the yellow line. The sideways market and “retesting” look very similar to what occurred in 2014-2016.

Retest the Lows

There is probably a good chance we will still see a couple more weeks of increased volatility before a bottom is put in, so we may have to wait a bit for this to play out.  However, since the positives in our economy outweigh the negatives right now, this does have the earmarks of a period of market consolidation similar to 2014-2016 and we probably need to “fasten our seat-belts” similar to a pilot telling the passengers to prepare for a bit of a bumpy ride in the near future until the atmosphere smooths out again.

As always, please contact us if you have questions or concerns.

Happy Thanksgiving!