With the final trading day for October upon us, the S&P 500 is down 9.4%. This October is on course to be the 3rd worst October since 1980 behind only October 1987 and October 2008. According to Bloomberg, global stock markets have collectively lost $9 trillion in the past five weeks. This loss now exceeds the $8.2 trillion that global stock markets lost during the week that Lehman Brothers collapsed in 2008.
Five concerns seem to be weighing on investor confidence
· Several economic indicators appear to be stalling or retreating from extremely high levels.
· Corporate earnings are strong, but expectations of future strength have weakened.
· The trade war with China is escalating significantly.
· Interest rates have risen materially.
· The Federal Reserve is removing money from the financial system at a meaningful rate.
On the following page, we highlight a study from Bespoke Research which studied historical declines in the US market of more than 7.5% following all-time highs. The S&P 500 reached an all-time high on September 20th. Its decline since this high has reached nearly 10%.
What happens next?
Historical analysis suggests the dispersion of potential returns is wide, but on average:
· The S&P 500 rises 2.90% over the following 3 months
· The S&P 500 rises 5.56% over the following 6 months
We must stress that these are simply historical averages and not a firm prediction of the future. These data sets are just one of many inputs into a durable investment strategy.
We are witnessing regime change in the US stock market. Few investors are prepared for an environment where stocks, bonds, and the US Dollar all retreat simultaneously. The current sell-off will have lasting implications for global capital allocation. US Treasury yields have broken out above their multi-decade downtrend-line. History suggests that the massive US federal deficits in the coming years are likely to fuel a lengthy downtrend in the US Dollar. The US stock market’s persistent out-performance of other global markets seems near an end.
After 9.5 years of growth, many investors have a higher percentage of their portfolio in equities than risk tolerance and life situation warrant. If we experience a ‘relief’ rally over the coming months, this rally should be used to reallocate appropriately.
This newsletter is a publication of Anson Analytics. It should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change.
Information presented does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information on products and services. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client's portfolio.
Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended by the adviser), will be equal to past performance levels.
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