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Making Sense of the Selling:
We have seen a significant drop in stock markets around the world since the beginning of October:
- S&P 500 -5.08%
- Nasdaq -6.17%
- Small-cap US stocks -8.87%
- International Developed Markets -6.09%
- Emerging Markets -6.13%
What has caused this sell-off?
Long term US Treasury yields broke out from a 40-year down trend last week. Concerns over rising interest rates have created a market where both stocks and bonds go down simultaneously. The effect of rising interest rates will be felt in numerous parts of the economy such as corporate profits, consumer spending, housing, currencies, and budget deficits.
Several factors are pushing yields higher:
- The U.S. economy is in the late stage of the economic expansion, but has grown above trend due to the 2018 tax cuts.
- Capacity utilization is high and wages are rising.
- The intensifying trade conflict with China suggests disruption in many supply chains, which will likely lead to higher prices.
- The Federal Reserve is raising short-term interest rates as well as contracting the monetary base. The Fed will remove another $600 billion in liquidity from financial markets over the next year. Additionally, the U.S. Treasury must issue $1.3 trillion of new debt over the next 12 months. This will likely put upward pressure on interest rates.
- While this sell-off is significant, underlying economic data in the US is still very strong.
- Unemployment is extremely low
- Both Services and Manufacturing parts of the US economy are still expanding
- Corporate earnings are strong and forecast to be solid through mid-2019, growing 9% next year. Third quarter earnings of this year are expected to be 21% higher than this time last year.
- What does this mean for my portfolio?
- While this sell-off is most likely just a re-rating on valuations and a check on momentum, further volatility is likely. The U.S. stock market is in a long-term topping process and an instant bounce back to new highs should not be expected.
- Interest rates have increased along with global risks. This is a prudent time to re-assess one’s personal risk tolerance. After 9 years of growth, many investors are overweight equities and should rebalance to more diversified, multi-asset portfolios.
If you have any questions about this information or want to discuss this further, please don't hesitate to email me or give us a call here at the office.
Thanks,
Sam
Sam Sweitzer, CFA │Principal│ANSON ANALYTICS, INC.│
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