The US stock market has fallen into correction territory, defined as a 10% or greater decline from recent highs. The correction began this month, suddenly. Thus, it has been a quick and sharp move down, the biggest monthly decline since 2009. Our clients’ portfolios have suffered declines this month but have fared better on a relative basis due to the asset allocation mix and diversification benefits.
What we know:
1. The technology sector has been hit the hardest. The “FANG” names (Facebook, Amazon, Netflix and Google) are collectively in a “bear” market, defined as a 20% or greater decline.
2. For now, this does not appear to be a panic sell-off. If it were we would expect to see a “flight-to-quality” move from stocks into high-quality bonds. This has not occurred.
3. Underlying economic fundamentals remain constructive, supportive.
What we don’t know:
1. What caused it? There is no clear catalyst for the move. Rising interest rates? Lowered corporate earnings expectations? Investor complacency? Tariffs? China slowdown? Geopolitical risks? US midterm elections? Yes, no, perhaps.
2. Is the worst behind us? We don’t know if the market has bottomed or is even in a bottoming process.
3. Have the markets hit an inflection point? We don’t know if this is a cyclical (short-term) correction inside of an ongoing, secular (long-term) bull market, or if this is the beginning of a secular “bear” market. Historically, in the post-WWII era, bear markets have mostly (10 out of 13 times) coincided with excessive interest rate hikes (“tightening”) by the Federal Reserve that lead to recession.
1. Relax. Corrections are normal. (We just haven’t experienced much market volatility in the post-credit crisis era of extreme monetary policy stimulus from global central banks.)
2. We reevaluate. In a broad-based market sell-off the good gets sold along with the bad and ugly. Thus, we now have a bigger opportunity set to choose from.
3. We rebalance. Corrections can provide us with timely opportunities to rotate from that which has outperformed to that which has underperformed. (This portfolio management discipline keeps return expectations in-line with risk tolerances.)
Please call us at 318-675-0826 if you have any questions about your account(s). Sincerely,
Jack E. Ditt, Jr. William L. McCollum