I would like to thank you for being such great clients and friends. Happy Chanukah to those who celebrated and Merry Christmas to those that are looking forward to celebrating. A Happy and Healthy New Year to all!
As the year comes to an end, some of you have expressed worries about the stock market. The level of volatility we’ve experienced to date is something that we have not seen in years. It is obvious why it could cause some stress.
There are a lot of contributing factors that have caused the volatility. Issues such as recession worries, inflation worries, the inverted yield curve, slowing economic growth, slowing earnings growth, geopolitical issues such as the trade wars and tariffs with China and finally the multitude of issues surrounding President Trump. All of these factors are real and need to be considered. While all of these are on the radar of many and may or may not affect the future of the markets, they are certainly causing short term pain.
The stock market can absorb some of the impact from these issues, but cannot plan for uncertainty and there is a lot that right now. It’s my position that, if you look through all “this noise and uncertainty” there are other things more relevant to why there is so much volatility.
The market is more and more controlled by algorithmic selling and buying programs - computers that make decisions based on price movements alone. Passive ETFs are growing into more prominence as compared to the past, relative to actively managed investments. This means computers may be making the decisions instead of financial professionals more often than we have previously seen.
This leads to sales triggering more sales without professionals actually making decisions. In this time of uncertainty, few stocks are really leading the charge, and year-end profit taking has even caused many to lose value. Then the computer algorithms are triggered again, causing sell offs to be more pronounced recently.
I believe it’s fair to say that tariffs, if not repealed, could affect the future earnings of many companies. Many CEOs are mentioning it in their earnings reports. Additionally, the worries that the earnings cycle may have hit a high, combined with the rise in interest rates as the FED has tightened are valid.
In spite of this, economic growth is still at a higher level than in years past. Earnings are still up, unemployment is near all time lows, wages are rising, and the consumer is spending. Furthermore, I don’t believe that there is a recession coming anytime soon. In fact, historically when the yield curves invert, a recession is 18-24 months thereafter. Inflation is not out of control, with the price of housing and oil coming down. Even though interest rates have moved higher (but not yet at a historical point), it seems to me that investors have yet to come to the belief that they will compete with equities. I also believe valuations have come down to levels that are very reasonable on a historical basis especially considering the growth rates that many companies are still exhibiting.
Having said all that, I believe using short term investments that are uncorrelated or less correlated to the US stock exchange can help reduce or hedge the downside during sell offs. I continue to be cautiously optimistic in the markets and think that the sell offs have been exaggerated. I continue to evaluate my client’ investments to help make sure they are in line with their objectives, risk tolerance and time horizon.
Lastly don’t forget that as the year is coming to an end, tax loss harvesting can be effective in offsetting taxes. That means selling investments at a loss and replacing them with new investments that have different strategies or holdings. If your tax preparers have any questions, please feel free to have them call us.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information is not intended to be used as a primary basis for investment decisions and should not be construed as advice meeting the particular investment needs of any investor. The information presented does not constitute a solicitation for the purchase or sale of any security. When considering the performance the US market performance, we considered the S&P 500. The S&P 500 is an unmanaged index and cannot be directly invested into. Investing involves risk and the potential to lose principal. Past performance does not guarantee future results. LPL Financial does not offer tax advice. 05/19
Jordan Kerner
Financial Advisor, Waddell & Reed, Inc.
Office: 475-619-2240 | Cell: 917-301-7274 | Fax: 203-557-6262
www.jordankerner.wrfa.com | jkerner@wradvisors.com
495 Post Rd E Ste 209| Westport, CT 06880