Halloween came early to Wall Street, a specter materializing as an unsettled market that for investors was no treat. On Friday, Oct. 26, the S&P 500 index closed a hair short of being down 10 percent from the record high of Sept. 20. A “correction” is a drop of at least 10 percent from a recent high. Such events are not a treat, but they aren’t a trick either. They are in fact routine and should be expected since they occur about once a year.
Also, on the Oct. 26, the Dow average closed down 2140 points from its record high of 26828.39 on Oct. 3. The magnitude of the drop appears worse than the 8 percent reality when expressed in thousands of points. The tech-heavy Nasdaq Composite Index closed down 11.6 percent from its all-time high on Aug. 29. High-flying technology shares, especially the FANG stocks, Facebook, Amazon, Netflix, Google, have settled a bit closer to earth as the tech crystal ball glows less brightly.
As advisors we hammer home the reality that volatility and periodic corrections are normal in the ownership of equities. Investors in the accumulation mode, such as making periodic contributions to retirement plans or other long-term buckets, should use slumps to add more money, taking advantage of cheaper shares. Investors in the decumulation phase, including those taking Required Minimum Distributions (RMDs), should have adequate safe money reserves to preclude selling stocks beyond RMD minimums during a down cycle on Wall Street.
Patience is required. Per Motley Fool, the average correction on the Dow, about 13 percent, lasted roughly 72 trading days, about 14 weeks. Corrections range between 10-20 percent from a previous high. Breaking through 20 percent signals a bear market. While we don’t make predictions of performance, there is little sentiment that a bear lurks in the shadows. The economy is doing well, growing 3.5 percent in the third quarter, off slightly from the second quarter’s 4.2 percent GDP growth. But Mr. Market has a habit of worrying about too much good news. With robust growth, will the Federal Reserve Bank play Grinch and take away the low interest punch bowl too quickly?
Rising interest rates are attracting money from abroad and interest rate sensitive sectors are slowing, e.g., housing and commercial construction and car and truck sales. Tariff wars erode confidence. Earnings expectations are less glowing. The Wall Street Journal, Oct. 27, reported that almost half of the companies that comprise the S&P 500 have posted third quarter results with almost 60 percent exceeding expectations. But the one-year average is 73 percent exceeding expectations, hence disappointment.
There are global concerns. Turkey, not long ago a glowing success story and hot tourist destination, is an economic mess. Annual inflation is an astounding 24.5 percent. Per Martin Weiss, Oct. 26, the Turkish lira has plunged in value, down 50 percent against the U.S. dollar in a year. President Erdogan seems bent on anti-western policies, spurring the dumping of the lira. Some of this money flows into the U.S. dollar and the stronger dollar stifles exports, another source of investor anxiety.
Why doesn’t flight money seek the euro? Worries about Italy are surfacing again, given massive debts at 132 percent of GDP on top of huge private sector debts. Italy is among Europe’s four largest economies and will the others, especially Germany, rescue Italy if push comes to shove? Moody’s Investors Services recently downgraded Italian debt to “junk.”
It’s time to cry for Argentina. The inflation rate recently hit an annualized rate of 78 percent, the peso is in free fall, the economy is shrinking, poverty is increasing. The only good news (for American buyers) is that first rate Argentinian wine is a great bargain!
Following the Jamal Khashoggi tragedy, the Saudi stock market tanked along with the kingdom’s currency. Per Weiss, uncertainty in places like the Middle East, Turkey, and Argentina cause capital flight into the dollar, making goods sold in dollars less competitive on world markets. Will that restrain the Fed in raising interest rates? Mr. Market wants to know.
President Trump is playing “tariff chicken” with Xi Jinping in China. Who will blink first? The Chinese currency, yuan, is near a 10-year low against the dollar, the Shanghai Composite Index is approaching a 10-year low, and Chinese GDP growth, recently reported at 6.9 percent, is way off the sizzling pace of 10% plus back in 2006-2008. Chinese statistics are always suspect, however. Compared to many places in the world, the U.S. economy is a wonder. But with the bull market getting long in tooth, investors should expect potentially lower returns and higher volatility going forward. Nevertheless, be of good cheer. Holiday decorations will be going up shortly at the mall. How many shopping days are left?
Lewis Walker, CFP®, is a financial life planning strategist at Capital Insight Group; 770-441-2603. Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative and investment adviser representative of SFA which otherwise is unaffiliated with Capital Insight Group. He is a Gallup Certified Strengths Coach and a Certified Exit Planning Advisor (CEPA®).