Dear Readers,
I’ve received a few calls this week to get my opinion on the current market downturn. Its understandable considering October turned out to be the worst month for stocks since October of 2008, shortly after the collapse of Bear Stearns and subsequent collapse of Lehman Brothers. I want to first note that this downturn is not like that one. Banks are well capitalized, and the financial system is not having a liquidity crisis. I’ve tuned into several economists, most recently Liz Ann Sonders, to compare opinions about what may be driving this market action.
The factors that are being repeated over and over include:
The Escalating Trade War with China: It’s entirely possible that Trump will tariff every good that China imports to us. By some estimates, that business is worth half a trillion dollars. * It’s not clear exactly what will happen but so far China has not responded well to US accusations of technology theft and our escalating tariffs. The stock market hates uncertainty, so while this all pans out, the market, and specifically companies impacted by these tariffs, are likely to suffer.
Rising Rates: Let me start by saying that normalized interest rate policy is a good thing! The primary reason we’ve had interest rates so low for so long is that the US economy struggled to regain its footing following the 2008 financial collapse. Even after the stock market rallied strongly from 2009-2014, there was widespread belief that “Main Street” wasn’t experiencing the same recovery that “Wall Street” was. As such, the Federal Reserve maintained a low rate policy to encourage borrowing and to push investors into risk assets. Many believe the Fed drove the stock market higher with these policies. Now that we are experiencing consistent economic growth, the Fed is pulling off the training wheels. While healthy, this could be analogous to any person going through withdrawal from something – there is a period of discomfort that follows.
Economic Contraction: It is often said that the stock market anticipates events and trades well ahead of them. Because this bull market has lasted so long, any collection of data that points to economic contraction could cause the market to drop. The GDP (economic growth) read from Q3 was a solid 3.5%, but many are interpreting the cautious profit outlooks from companies reporting earnings to indicate an expectation of slower growth going forward. That doesn’t guarantee a recession is on the horizon, but it could cause the stock market rally to stall.
These are the primary reasons we’re hearing for why the market has dropped roughly 10% this month. While it may seem like the sky is falling, I want to remind my clients and readers that the economy and stock market have recovered from many tough periods over the past few decades. Each time these tough periods present themselves, it feels worse than it really is, probably because the stock market tends to climb slowly over time and then drop rather suddenly.
My best advice in this time is not to focus on the market headlines, but rather to focus on your personal situation. If you’re in your 30’s or 40’s and investing through qualified plans such as 401Ks and IRAs, these dips shouldn’t matter. In fact, they help because your now buying stocks and reinvesting dividends at lower prices.
The people who should assess their portfolios most carefully are those that are living off bond interest and stock dividends to ensure that their financial plan is solid and that they can withstand these levels of volatility. Checking your current allocation and withdrawal rate would be wise.
It also never hurts to review your cost exposure and the type of investments that you own within your portfolio. We obviously can’t control the daily movement of the markets, but we can make sure we own efficient investments that are in line with our overall objectives, time horizon, and risk tolerance.
As always, feel free to contact me with any questions or concerns.
Best,
Russell Bailyn
Vice President
Premier Wealth Advisors LLC
14 E 60th St, #402
New York, NY 10022
P: 212-752-4343 *231
F: 212-752-7673
Author: Navigating the Financial Blogosphere
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*https://www.bloomberg.com/news/articles/2018-07-20/trump-says-he-s-ready-to-go-with-tariffs-on-all-china-imports