Stock Market volatility is back
Volatility has crept its way back into the global markets. In the U.S., this is now the worst October for the markets since the financial crisis in 2008. So far this month, the S&P 500 has lost over 8%. Small cap stocks as measured by the Russel 2000 have lost over 11% and the NASDAQ has lost over 10%. If you watch any of the business channels, talk to your friends or co-workers, or spend any time on social media you have probably heard a dozen or so reasons as to what is going on. Unfortunately, a lot of what you hear are opinions not facts. We will just stick with the facts. First, as a primer, please read our post (here) from April 30, 2018. That post will tell you almost everything that you need to know about stock market cycles and the current time frame of the cycle.
So what is going on in the markets?
People always ask us how the markets can be really calm for a period of time and then change immediately. The markets get data 24/7 and the participants then make decisions immediately about future values based on this information. So a lot of times, it's shoot first and ask questions later. In 2017, the majority of the data (i.e. GDP growth, earnings, interest rates, etc.) was positive and steady; therefore volatility was almost nonexistent. As I have pointed out in past blogs, this is generally not the norm.
At the start of the year, some uncertainty finally showed up and the markets reacted with a correction of around 10% that ended in February. There were two main catalysts for the selloff: the tariffs our Government put on China and rising interest rates. Here are the current facts. Right now, we are in the middle of earnings season and we are hearing from many CEO’s that the tariffs are definitely having a negative effect on their businesses. For our multi-national companies, with the troubles in overseas economies, the U.S. dollar is continuing to gain strength (which is making our goods and services more expensive overseas). Rising interest rates are also now being felt in many industries, especially housing. With 30 year mortgage rates now over 5%, home prices have started to drop and housing starts are going down. The homebuilder’s index, XHB, is now down over 25% YTD. As I write this, Mohawk Industries (MHK), the largest flooring manufacturer in the U.S. is down 25% today due to lower earnings and guidance. The CEO blamed the miss on higher inflation (rising input costs) and lower demand. Many other CEO’s have also mentioned higher inflation creeping in and an inability to offset their costs with price increases. All of these factors have led to a lot of uncertainty about future sales and earnings growth across many industries and the stock market is reacting. Additionally, for some investors, the yields on fixed income investments are getting high enough to take them away from the riskier stock market.
As an investor, what should I do?
At this point, nobody knows exactly how the current market down turn is going to end. This may be a run of the mill correction and a reset of expectations or maybe this is finally the end of the 10+ year bull run. Either of those outcomes are possible and are normal parts of market cycles. The only thing that matters is your own behavior; how do you react to all of this? Unfortunately, we as humans are pre-programmed horribly for these type of events. Our brains tend to tell us to buy at the top (fear of missing out; greed, i.e. Bitcoin, Dot-Coms) and sell at the bottom (just can’t take it anymore, fear). If you are an investor, you need a plan. If you already have a plan then you know ahead of time what to do in these situations and you are less likely to act on your emotions. Right now is a really good time to review your investments and your plan to make sure they are aligned with your goals.
Some things to consider are:
- Is my portfolio too risky for me and/or my goals?
- Am I fully invested? Should I be?
- Am I over weighted in any stock, sector, or investment that could negatively impact my portfolio?
- Should I take profits and rebalance?
- What is my overall allocation?