How Excited Would You Be if Your Favorite Retailer Advertised a 4% Sale?
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 10/12/18. Rates and Economic Calendar Data from Bloomberg as of 10/15/18. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
How excited would you be if your favorite retailer advertised a 4% sale on all of their products? Chances are, most consumers wouldn’t even notice a 4% sale, let alone go out of their way for the opportunity to buy a desired item at a 4% lower price point. So why are certain investors concerned about U.S. equities falling nearly 4% on the week, and is this heightened level of uneasiness justified? While we understand that the return of stock market volatility can be a cause for concern, we believe that this round of volatility would be short lived thanks to a healthy economic back drop. Before we go further into our reasons for optimism, let’s first provide an update on where global capital markets stand as of the end of a highly tumultuous week.
In the U.S., the S&P 500 Index recoiled 4.07%, settling at a level of 2767, while the Russell Midcap Index lost 4.69% for the week. The Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, followed the lead of its larger counterparts, dropping 5.22%. On the international equities front, developed markets lagged emerging markets falling by 3.91% and 4.58% respectively. Finally, the 10 year U.S. Treasury yield fell back to a level of 3.15% as global investors sought the perceived shelter of U.S. Treasuries and pivoted to more of a “risk off” stance.
So, why aren’t we overly worried about last week’s steep sell-off in equities, and why are we so confident in our view that the future remains bright for U.S. equities (and international equities over the longer term)? To start, it appears that the selloff was triggered by concerns that the Federal Reserve would increase interest rates at a faster pace than had already been priced into the market. The major caveat here is that this speculation stems from the view that the Fed will be forced to increase the pace at which they increase rates simply because the economy is so robust. In our view, the strength of the U.S. economy is a positive, and fears that the Fed will blindly and rapidly raise interest rates are overblown. Regardless of the Federal Reserve’s actions, rates appear to be soundly below a level that could restrict corporate profits, and, by extension, stunt stock market growth.
Moreover, U.S. equity market valuations appear reasonable from a historical standpoint. In fact, the Price-to-Earnings (P/E) ratio of the S&P 500 following last week’s sell off is actually below its 25-year average. Although a single metric like the PE ratio should never be used to judge the attractiveness of an overall market on a standalone basis, it does give merit to the belief that U.S. equities are fairly valued (and possibly undervalued) when taken into conjunction with other relevant statistics.
As it currently stands, U.S. equities appear to be fairly valued, and the underlying economy continues to impress, but it’s the unknown that often poses concerns to investors, such as exogenous shocks to the market that simply cannot be forecast because they’ve never happened before. While it’s impossible for investors to avoid this risk entirely, they can help protect themselves from the unexpected by building a balanced and diversified portfolio and having a financial plan in place. As a result, we encourage investors to revisit the diversification that may, or may not, be in place within their existing portfolios and update their financial plans as appropriate. If you would like to learn more about how we are helping clients invest dynamically and consistently with their own goals, time-frame and tolerance for risk, please do not hesitate to speak with your Hennion & Walsh Financial Adviser.
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion & Walsh cannot guarantee the accuracy of said information and cannot be held liable. This information is provided for informational purposes only and is not a solicitation to buy or sell any of the asset classes or sectors discussed.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
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MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.