Is the Market Oversold?12-18-2018 |
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 12/14/18. Rates and Economic Calendar Data from Bloomberg as of 12/17/18. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Major averages finished down last week after a choppy trading session, posting another negative weekly return for the fourth time in the last five weeks. U.S. and global equities swayed throughout the week on encouraging news as President Trump struck an optimistic tone regarding trade with China. We even saw tech stocks lead a rebound early in the week. However, after a series of disappointing economic updates out of China and the European Union, stocks experienced sharp declines as fears of a slowdown in global economic growth overcame generally positive domestic economic updates. In the U.S., the S&P 500 Index, the Dow Jones Industrial Average, and the Russell 2000 Index retreated 1.22%, 1.17%, and 2.52% respectively. Overseas, developed and emerging markets fared only slightly better losing 0.89% and 0.95% respectively. In addition, the 10 year U.S. Treasury yield remained below 3% for the second consecutive week, settling at 2.89% to cap-off the week’s risk-off tone.
Moving forward, let’s take a look at some of the headwinds and tailwinds that we see currently influencing market sentiment and direction:
• U.S. – China trade & tariff negotiations
• The Federal Reserve interest rate expectations (more to come from Wednesday’s meeting)
• Global economic growth
• Washington DC drama (will intensify as we get closer and closer to 2020 presidential election cycle)
• Continued earnings and GDP growth
• Full Employment
• Moderately rising wages
• Strong consumer – Strong holiday shopping season, notably E-Commerce, leading to strong 4th quarter earnings
• Continuation of corporate tax cuts and a more accommodative regulatory environment
This type of volatility we’re currently experiencing is not entirely abnormal for the late stages of a bull market cycle. However, at this point, we would have to question if investors are fully discounting all of the headwinds without giving any credit to the underlying tailwinds listed above. In addition, the headwinds relating to U.S. – China trade and the Federal Reserve could in fact change force over the course of the next few months. In other words, is the market now oversold?
A recent survey from the American Association of Individual Investors (AAII) shows investor sentiment is leaning more bearish, and understandably so, given the whipsaw volatility and multiple pullbacks since October. However, if we look deeper into the survey, investors were primarily pointing to concerns about trade. If we can get past U.S. – China trade negotiations, pessimism is likely to be quelled. In terms of an upcoming recession you may have heard or read about, we do not see one looming and would in fact caution investors from leaving the markets early, especially at the already low valuations. Based on our research, equity performance has been quite strong in the late stages of a bull market cycle. Consider this, historically a recession does not begin until 20 months after the onset of a yield curve inversion on average and equity markets averaged a 19% growth rate over that time frame.
Regardless, asset allocation, diversification, and adherence to a longer term, customized financial plan will be critical in the months and years ahead. We encourage investors to stay disciplined and work with experienced financial professionals to help manage their portfolios through various market cycles within a well-diversified framework that is consistent with their objectives, time-frame and tolerance for risk.
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.
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