Not so Happy Halloween… all tricks, no treats…
As I wrote a couple weeks ago, we’re in the midst of a long-awaited correction in the stock market. October will doubtless end up being the worst month since the tumultuous financial crisis of 2008. All major averages swooned badly, and many portfolios experienced double digit losses. Markets always go down much more quickly than they go up, and the swiftness of October’s deepening trough has been a bit alarming. Volatility has increased, but not to overly dramatic levels. We may need to see more pain before calmer waters appear.
I don’t want to sound like the proverbial broken record, but corrections are perfectly normal. Repricing simply occurs from time to time on Wall Street. Unfortunately, selling tends to beget more selling due to electronic algorithm trading programs and margin calls. As long-term investors, we have to remain patient through these thankfully infrequent cycles, scary though they may be. None of us will ever need 100% of our money at once, and we must not heed the rumbles of cognitive dissonance.
It’s difficult to pin this correction onto one specific reason. Frankly, there seem to be several:
- Nervousness about the Federal Reserve raising interest rates again in December
- Imposition of stiff tariffs, particularly between China and the United States
- Anxiety about the mid-term elections
- Poor performance in international markets
- Sizable run-ups in tech stocks
- Brexit and the potential slowing down of the Chinese economy
- Greater attention being paid to America’s rising deficit
We’ll know about election results next week, and that piece of uncertainty will be over. However, the others should still be on the table, and the election may spur new angst. The markets may feel a bit like 2008, but the overall divisiveness in our country resembles 1968. The concentric circles simply repeat themselves.
However, as far as stocks are concerned, I see little resemblance to the debacle of 2008. Ten years ago, banks were closing and the housing market was in a massive bubble. Corporate balance sheets were bloated with debt, and the entire world financial system was on the abyss of massive disaster. In 2018, banks, at least in the US, have never been stronger. Balance sheets are flush with cash. Earnings continue to be solid in most sectors, though very company specific. Consumers are spending money. Yes, we’ve been in a tailspin for the last three weeks, but there doesn’t seem to be significant structural damage to the economy.
Market repricing is honestly where we are right now. The price/earnings ratio, or P/E, went from a slightly elevated 16.5 at the beginning of the month to a sub-normal 14.9 this past Friday. Logically, that should begin to signal a buying opportunity at some point, and many metrics are quite oversold. We’ve had a “dead cat bounce” or two, but not the kind of capitulation that we need for this correction to be over. Patience and antacids will be necessary for a while.
I have no idea when this phase will conclude, and neither does anyone else. Pundits have theories, but I’ve lived long enough to know that markets tend to act on their own. As the famous philosopher once said, “It will be over when it’s over.” In the meantime, it’s critical that we keep our wits about us. Now is a great time to discuss your scenario with us. RC, Kelley, and I are here to do everything from speaking logically to you about this correction to holding your hand if necessary. Making sure that your long-term plan is intact is always our first order of business.
Unexpected stock downturns just happen. They’re as much a part of the process as market upside. Our job is to calmly guide you through the storm. Please feel free to call or e-mail with any questions or thoughts that you have. It certainly doesn’t feel good out there right now, but this too shall pass. If I knew exactly when, I’d be working the state fair circuit guessing weights and ages.
Thanks as always for your continued trust and support. I look forward to hearing from you soon.
The opinions expressed in this letter are those of William Schiffman and should not be construed as specific investment advice. All information is believed to be from reliable sources; however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Diversification cannot assure a profit or guarantee against a loss. Indices are unmanaged and do not incur fees, one cannot directly invest in an index.