Slowdown Doesn’t Mean Recession
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 11/23/18. Rates and Economic Calendar Data from Bloomberg as of 11/26/18. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Global equity markets took it on the chin last week, continuing their steady decline from certain all-time highs as the S&P 500 Index retreated 3.77%, settling at a level of 2633, and the Russell Midcap Index fell 2.48% for the week. Moreover, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, receded 2.53%. On the international equities front, developed markets lost 1.09%, while emerging market equities gave up 1.73%. Finally, the 10 year U.S. Treasury yield fell 2 Bps (i.e. 0.02%) settling at a level of 3.05%, as investors took a risk-off stance and sought out the perceived safety of U.S. Treasuries.
It’s justifiably difficult for investors to get excited about these performance statistics, or any equity market performance measures over recent months for that matter, but we’re here to tell you that there’s more than just doom and gloom on the horizon. We fully acknowledge that volatility has returned to equity markets, and economic growth appears to be moderating slightly, but investors shouldn’t interpret these signs as the beginning of the end or assume that an economic recession is imminent.
In fact, the volatility that equity investors are currently facing is in line with historical averages, while the volatility investors experienced in 2017 (or lack thereof) was frankly unusual. Historically the S&P 500 Index increases or decreases by 1% roughly 60 days in a year. However, 2017 only saw eight such days. Furthermore, a slowdown in economic growth does not equate to an economic recession. A slowdown in economic growth in this context simply means that the economy is likely to grow at a rate closer to 2%, rather than its recent 3% to 4% levels…but it’s still growing! A growing economy, coupled with historically low interest rates and inflation levels, should be beneficial for certain areas of the stock market.
We continue to believe that there is more upside potential on both domestic and international fronts, but growth expectations should be tempered accordingly. While we remain cautiously optimistic regarding the growth potential of the global economy overall, we understand that known headwinds and unforeseen risks are ever-present. One way to help defend against such risks is by building and maintaining a diversified portfolio consistent with ones longer term financial plan. In this regard, we encourage investors to revisit the diversification that may, or may not, be in place within their existing portfolios and update (or complete) 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, timeframe 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.
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.