3rd Quarter Newsletter 2018
October is upon us once again. Having lived through more Octobers in our profession than we would like to count, we have come to expect some bewitching activity. Traditionally investors have seemed to be haunted by ghosts of Bear Markets Past. With the Fed raising short term rates, ongoing tariff issues, and concerns about the outlook for global growth, there are plenty of goblins afoot to keep the pot stirring. In the past two weeks, political signs appearing on the grass as fast as falling leaves, have reminded us that mid-term national elections add another ingredient to the cauldron. The brew certainly has been bubbling fiercely throughout the month.
Tuesday Oct. 23rd, the market rebounded from a sharp selloff; at the same time the “flight to safety” in the Treasury market proved short, as Treasuries lost ground at similar pace. Wednesday the 24th those reversals disappeared. In fact, the Dow and S&P wiped out all YTD gains, turning negative for 2018. Fear breeds fear and selling triggers more selling. Yet, Dorsey Wright noted in Wednesday’s Portfolio Strategy Report, the percent positive indicator for the S&P finished the previous day at 64%, “well above the 50% watermark.” They also noted, “this tells us that 64% of S&P 500 stocks are trading in an overall positive trend. Strong, healthy markets often occur when the PT indicators are above 50%.”
Driving the selloffs are some real fears: an aggressive fed policy, rising costs of borrowing, midterm elections and their potential impact on the economy, the economic slowdown in China, and major cracks appearing in the housing market, which fueled much growth over the last several years. Yet many companies continue to report strong earnings and are giving guidance for continued growth. In past economic cycles, we have often navigated higher rates, rising inflation, and eventual fed stimulation to help get us through a downturn, without slipping into a recession.
As we write this newsletter on Thursday the 25th, the markets are posting good gains, recovering much of Wednesday’s losses. Will this October prove to be another healthy correction in an ongoing bull market? Or will investors be spooked into capitulation, calling an end to the long run of the bulls, and bringing in the bears? We have been defensive throughout the year, accumulating cash, and weeding out under performers. We feel that a strong cash position is key to navigating these volatile times as this will provide clients with liquidity without having to sell into a falling market; and provide us with the opportunity to buy at value prices when the dust settles.
We feel we are as prepared as we can be to weather the volatility, but we understand these are not comfortable times for our clients. Please don’t hesitate to reach out if you are feeling anxious. By Halloween we may know whether the tricks or the treats won. Enough pullback in equity prices could bring them back in line with a scenario of slower earnings growth, and the underlying bull market could continue for some time.
As we finish the year, we look forward to seeing many of you at our Annual Open House, at our office, Friday, Nov. 16th. We appreciate our relationship with each of you and would love to host you. Thanksgiving comes the following week; and we will be thankful for all of you.
The Galarneau Group