Market Commentary – October 25, 2018

What makes a truly scary movie?  It’s not the slashing and the killing but the suspense.  Suspense done the right way builds terrifying fear even though we know the movie isn’t real.  Some of the most iconic horror scenes are those that create fear that goes beyond the movie.  I know I lost sleep after watching The Shining for at least a week.

Right now the market is very scary and generating a lot of fear.  CNN’s Fear & Greed Index is in extreme fear territory and its lowest reading since February this year.  After yesterday’s pull back the S&P 500 is barely positive with a 0.88% return and U.S. small and midcaps are in negative territory for the year. Technology stocks and the Nasdaq Index after screaming in the third quarter are having their worst month in over a decade with double digit losses.  International equities as a group, which have been in negative territory since September, are close to bear market territory (losing 20%).

So-called “market experts” are trying to explain what is causing the volatility.  Some favor a slowdown in global growth caused by tariffs, trade war escalation and possibly a new cold war between the two largest economies in the world.  Others are pointing to increase in rates and Fed Chairman Powell’s statement on October 3 when he said the Fed “may go past neutral.”  And some are pointing a potential change in power in D.C after the elections.  Perhaps one of these is the reason, perhaps it’s a combination, and perhaps it is normal market volatility.

Despite the market volatility, corporate earnings as a whole are still very strong.  Yesterday after the close, Microsoft and Tesla both beat earnings estimates.  Tesla reported a big beat and posted a decent profit.  Most leading economic indicators show that the U.S. economy is very healthy and a recession is not in the foreseeable future.  And this morning the US Department of Labor reported that U.S. jobless claims are the lowest in 45 years.

Predicting the economy is also hard. From 2010-2016, the U.S. had a mediocre economy but a very strong equity market. Secular stagnation was the term du jour.  Both Larry Summers and Paul Krugman said secular stagnation would be persistent and that is the reason why we will have “a lot of difficulty getting back to full employment.”   Yet five years after Larry made that statement we are at the lowest unemployment rate in nearly 50 years.

Predicting the short-term market moves is harder and very pragmatic, and that is why we are diversified. Perhaps we will be in a mediocre equity market and a strong economy.  Perhaps not.  But what we can’t allow is for fear to take over investing decisions.  Fear is pretty fun when watching a scary movie.  But fear is an investor’s worst enemy and leads to real losses.  Well not for everyone.  Warren Buffet who has lost 40% multiple times and who doesn’t try to time the market, does get a little greedy when others are fearful.

Markets look to open up this morning.  Bonds after rallying yesterday (risk-off trade) are pulling back, and the 10-year and the 30-year are trading at 3.139% and 3.353% respectively.  Oil is trading at $67.32 and has stabilized for now after Monday’s pullback.



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