At market close on October 15th, the S&P 500 index was down about -6.5% from its peak last month, and last Wednesday’s -3.2% loss was the largest decline since February. In fact, many of the same concerns that plagued markets back in the first quarter of this year – namely, rising interest rates and concerns over trade wars impacting global growth – are the same headlines being trotted out by pundits to explain the selloff this week.
In truth, not much has changed in terms of the structural integrity of the current market. Perhaps a better explanation is that these things just happen: markets go up, and markets go down. Guggenheim strategists estimate that, dating back to 1945, declines in the 5-10% range happen slightly more than once per year on average, lasting about one month in duration. In these times, investors are far better off waiting out the volatility, rather than trying (and likely failing) to time the market.
While it remains to be seen whether the current selloff will abate at current levels or continue into a more serious correction, we continue to monitor the situation through the lens of our data-driven Three Dials approach. Below are some helpful data points from each of our Three Dials:
Dial One – Momentum/Sentiment Indicator: Despite a rough start to the fourth quarter, the S&P 500 is still in positive territory year-to-date, and the index is holding firm to key trend lines. For now, this dial continues to be in the “fully on” position.
Dial Two – Fundamental Economic Indicator: Part of recent hand-wringing is over the IMF’s decision to cut its forecast for global growth in 2018 and 2019 from +3.9% to +3.7%. While trade tensions and tightening financial conditions likely led to the IMF’s reduced growth rate, this is far from a prediction of global doom and more a moderating of growth expectations. In the US, leading economic indicators suggest that the domestic economy is poised to continue humming along at its current pace. In sum, economic fundamentals are strong enough to have us in a “fully on” position for this dial.
Dial Three – Market Valuation Indicator: We have long viewed valuations as stretched across equity markets, and part of the selloff seems to be stemming from a decline in the highly priced technology sector. The tech-heavy NASDAQ is down roughly -8.6% from its peaks, suggesting that valuation concerns are leading to steeper declines in tech and spilling over into the broader market. Therefore, our valuation dial remains in the “fully off” position.
As always, we will continue to monitor the evolving landscape. We are not advocating any significant changes for our clients at this time, but rest assured that we will make moves to further protect our client portfolios if/when our indicators suggest.