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Strategic Insights

Volume 7, Edition 36 | October 15 - October 19, 2018

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Why Is the Market so Bad?

Doug_Walters Doug Walters | Articles

Read Time: 5:00 min

051917_Intro2

Investors often have a “what have you done for me lately?” attitude with the stock market. Recent weakness once again has some questioning its merits…

Market Review

Contributed by Doug Walters

U.S. stocks clawed back some of last week’s losses in a volatile week of trading. In our video edition of Insights last week, we reminded investors that stock market declines are normal and that the best course of action is to “enjoy the ride.” This week we show readers how good the journey has been.

Stomaching the Ride

Lately, it has been hard to go out in public without someone asking, “What is wrong with the market?” My first instinct is to rattle off near-term news drivers:

  • Inflation / rising rate fears
  • Global trade skirmishes
  • Geopolitical tensions (Saudi Arabia, Russia, etc.)
  • Contentious elections approaching
  • Etc., etc., etc…

There is no shortage of market scare stories out there, and all of these are factoring into market jitters. But has the U.S. equity market been “bad”? No. However, it has been volatile, and that is normal. Stocks are supposed to be volatile! The attractive return we earn on stocks in the long-run is the reward for that volatility. If you want stability, put your money in a savings bank account (but do not expect to get paid much return for that).

So, let’s look at this “bad” performance. The chart below shows the return of the S&P 500 over each of the past five years. The most recent 12 months has produced a total return of 10.2%. Not bad… well above average!

Returns will not always be this good, and a look at struggling international stocks, confirms this (see Mind the Gaps). But these ups and downs are a normal part of owning stocks, and the long-run has been rewarding for those with the stomach for the ride.102018_chart

Strategy Update

Contributed by Max Berkovich , Aleksey Marchenko

STRATEGIC ASSET ALLOCATION

Patience is Golden

U.S. equity markets overcame a gloomy attitude, finishing higher for the week. Developed international equity failed at recovering lost ground, finishing near flat for the week. Emerging markets waved a white flag, ultimately finish in the red once again, thanks to continued weakness in China. Gold joined U.S. equities on the positive side, advancing higher for another week. Speaking of gold…

  • The price of one ounce of gold in October of 1918 sold for about $19.84 (an ounce of gold is at roughly $1,228). The price of gold nearly doubled after the Great Depression and remained stable until President Richard Nixon ended the gold standard in the summer of 1971. For the next ten years gold investors enjoyed staggering returns of over 1000%.
  • Gold can play a very important role in a fully diversified portfolio. It is viewed as a safe-haven asset with little correlation to equities. It has a potential to smooth volatility and improve portfolio’s performance over the long run.
  • On the flip side, investing in gold requires serious patience. For example, between 1980 and 2000, gold significantly underperformed stocks before advancing over 600% during the next 12 years.

STRATEGIC GROWTH

Tide has turned

The Materials sector was an undisputed laggard, dragged down by signs of weakening construction spending. Consumer staples, on the other hand, were a runaway leader thanks to…

  • Procter & Gamble Corp. (PG) the consumer products giant reported a surprisingly strong quarter. The maker of pampers and luvs topped consensuses and offered a bounty of strong guidance. The bounce in the stock was head and shoulders above peers, but the good news brought cheer and joy to the entire sector. It’s no secret that company has struggled with organic growth but maybe this a new era and the tide has finally turned, and growth is ready to cascade. Though the gain seems to be driven by price hikes not volume.

STRATEGIC EQUITY INCOME

Growing Interest

Despite a full calendar of earnings from the financial sector it was neither at the top nor the bottom. Consumer discretionary sector was the top laggard despite a strong challenge from the technology sector. Utilities sector was the leader despite rising interest rates. Speaking of interest rates…

M&T Bancorp. (MTB), US Bancorp (USB), BB&T Corp. (BBT) and Bank of New York Mellon (BK) all reported that their net interest margin, the difference between interest rate charged and interest paid on deposits continues to expand. Bank of New York, which is not a traditional bank, but a custodial bank and asset manager did not impress investors because it makes most of its profits from service fees not interest. Those fees were only modestly higher, missing expectations. Overall loan growth for banks was modest, but with higher rates more profitable and credit quality of borrowers is solid.

The Week Ahead

Contributed by Aleksey Marchenko

“GREED, for lack of a better word, is good” – Gordon Gekko

Gross Domestic Product (GDP) numbers for the third quarter will be released on Friday.

  • The preliminary GDP is estimated to grow by 3% year-over-year.

Rate decision from European Central Bank (ECB) will be announced on Thursday morning.

  • While rates are expected to be unchanged, comments from ECB’s Mario Draghi on the state of European economy can influence markets.

Earnings from technology and industrial sectors will dominate the week.

  • Strategic Growth – Caterpillar (CAT), United Technologies (UTX), Visa (V), McKesson (MCK), Alphabet (GOOG), Union Pacific (UNP), Expedia (EXPE) and EQT (EQT).
  • Equity Income – Microsoft (MSFT), Intel (INTC), Boeing (BA), Merck (MRK), Colgate-Palmolive (CL) and Phillips 66 (PSX).

Economics data such as Beige Book, Mortgage Application, Building Permits, New and Existing Home Sales, Durable Goods, and Michigan Consumer Sentiment may weigh-in on the markets.

Dodgers need one more win over the Milwaukee Brewers to set-up a battle with the Boston Red Sox in the 2019 World Series.

  • While the Dodgers have never faced the Sox in the World Series, the team’s predecessor the Brooklyn Robins lost to the Sox in 1916.

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets over $1 billion.

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