No Time to Be a Seller
October 11, 2018
In advance of our quarterly newsletter, we would like to briefly comment on recent stock market action. Those of you who follow the financial news are probably aware that US stocks have fallen sharply, with technology shares leading the retreat. Yesterday, the S&P 500 dropped –3.3% and shed another –2.1% today (–5.3% total since Tuesday), while the tech-heavy NASDAQ 100 sank –4.4% yesterday alone. Non-US stocks have held up better, with the ACWX (All-Country World Index ex-US) falling “only” –3.6% over the past two days. International’s outperformance today does not surprise us, as we have been saying for some time that US stocks are more expensive than their foreign counterparts, and thus more vulnerable to disappointment.
While the news media will tell you that rising interest rates triggered the decline, in fact interest rates had been rather stable in the days leading up the stock markets drop, with the big interest rate increases having occurred during September and the first days of October. As with most sharp declines, people search for explanations but typically come up empty-handed. That’s because investors, like most people, tend to feed off each other’s panic. Selling begets more selling, which finally stops when “bargain hunters” swoop in to buy equities at a discount.
We have no way of knowing whether the selling is mostly behind us or whether there will be more in the coming days and weeks, but we do know that this decline will end and stocks will recover. While some pundits are already worrying that the bull market may be over, the current decline looks like the opposite to us: a “pause that refreshes” during a rising market. There are several reasons why we think this, but here we’ll mention just one: rising interest rates. Rates would not be climbing around the world if the global economy were about to slip into a recession, which accompanies almost all bear markets. Interest rates are going up because the global economy is strong and is likely to stay that way for some time, despite tariffs and other threats.
The biggest negative we see today is rising inflation, which hurts stocks in the short run and bonds at all times. Fortunately, our portfolios are well positioned for gently rising inflation, with our equity positions emphasizing companies that benefit from economic growth and also have pricing power, and our bond portfolio invested to be less sensitive to rising interest rates than the broad bond indices. A sudden surge in inflation would cause us to rethink our positioning somewhat, but this seems unlikely at this time.
As we always do at times like these, we suggest you step back, take a breath, and realize that in the long run, even days like these past two are just noise. Volatility—in both directions—is part and parcel of investing and is the reason why investment assets return so much more than “safe” investments like CDs and money markets. An investor needs to take some risk in return for the rewards.
Dr. Ken Waltzer, MD, MPH, AIF®, CFA, CFP®
Managing Director, KCS Wealth Advisory
Laura Gilman, CFP®, PFP, MBA
Managing Director, KCS Wealth Advisory
Nick Nejad, CFA
Director of Investment Research, KCS Wealth Advisory
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