As I prepared for this week’s commentary, I reviewed various economic indicators I follow and then took a few minutes to read commentary from “pundits” and news sources. The realization I came to after reviewing these various conflicting opinions is that no one truly knows where the market will go in the short to medium term. Having an opinion or even a strong opinion backed up by statistics doesn’t mean one will be right. The month of October has been painful in the markets. We’ve seen all the gains of the year erased.
Fundamentally there is no news this month we didn’t have in September before the markets fell. The Fed has slowly been raising interest rates all year which we expected. We are in the midst of a trade tariff battle with China which has been talked about all year. To date, almost half (48%) of the companies in the S&P 500 have reported earnings for the third quarter. Of these companies, 77% have reported actual EPS above the mean EPS estimate, which is above the 5-year average of 71%.
The gradual interest rate hikes mentioned above have pushed the average 30-year mortgage rate to above 5%. Psychologically, this is a rate level which we haven’t seen since 2011 and for a brief period of time in 2013. Obviously, as interest rates go up housing affordability comes down. This will cause the rate of growth we’ve seen in housing to slow. Certainly, some areas will see this sooner than others. I wrote in our 4thquarter letter that it was likely that the overall economy was still growing, but at a decelerating rate. Sort of like when you take your foot off the gas in your car. You’re still moving forward, but as gravity takes over, at a decelerating rate.
Finally, while painful, market corrections are not uncommon. We were spoiled in 2017 because there really weren’t any moves of a material nature to the downside. Normal volatility has returned in 2018. It's a mid-term election year and the rhetoric on both sides is more vitreous than ever, which doesn’t help. The bull market we’ve been in is aging and everyone is waiting for a shoe to drop. Much of the volatility we see these days is programmed algorithmic trading which magnifies market moves in both directions. For investors with a longer time horizon this can certainly be trying.
I have no idea where the market will go in the short term. However, from a technical perspective, it would not surprise me if we test the lows the market set back in February. Economic expansions cannot last forever and at some point, we will have another downturn in the economy. I don’t think that happens in the very near term though. Expect more volatility into the mid-terms and stay focused on your long-term goals. Longer term, it’s always been a bad bet to wager against American economic growth.
This day in history:
Nearly four decades after he became the first American to orbit the Earth, Senator John Hershel Glenn, Jr., is launched into space again as a payload specialist aboard the space shuttle Discovery. At 77 years of age, Glenn was the oldest human ever to travel in space. During the nine-day mission, he served as part of a NASA study on health problems associated with aging.
Quote of the week:
“A thankful heart is not only the greatest virtue,
but the parent of all the other virtues.”
PUBLISHED BY NICK TOADVINE