Market Commentaries

  • Is the Market Oversold?


    Market Overview


    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.

    Happening Now                   

    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)
    • Europe

    • 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.

    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.

    Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.

    Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.

    Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.


    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.

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