We started the year with considerable market volatility that stemmed from the threat of tariffs and rising interest rates. While we’ve inched our way back from the early February selloff, the DOW marked the biggest single day selloff yesterday since February, and we are experiencing another selloff today.
We’ve suspected all along that the tech sector, which propped up the indices all year long, would reverse course or take a pause, and we witnessed this yesterday. However, analysts struggled to identify a particular event that triggered yesterday’s selloff.
What we do know is rising interest rates, wages, oil, the US dollar and tariffs all affect profit growth. As 3rd quarter earnings season is upon us, companies are at risk of missing earnings estimates. This is not necessarily a reflection on the value or success of companies.
It is important to understand that market declines have been relatively routine events. Stock prices don’t go up forever and these sharp market drops can be unnerving. With that said, we do not see this correction as a precursor to a recession as nothing in the economy, overall, has changed and corporate earnings are still strong.
We have one statistic to provide you for some perspective on the S&P 500, which is an index made up of 500 of the largest publicly traded corporations and is the most common benchmark for U.S. equities.
- The S&P 500 peaked on 10/09/07 before beginning a 17-month bear market that ended on 03/03/09. An investment in the S&P 500 on 10/09/07 is up +137% (total return) as of the close of trading on 9/21/18. This is an annualized return of +8.2% per year for the past 11 years (source: BTN Research).
Even though earnings growth may be impacted by some of the factors previously outlined above, portfolios that hold more diversified positions will benefit from seeing a rotation in asset classes as investors move from growth to value and income-focused investment strategies. We continue to believe that long term investing will benefit your long term rate of return, but you have to tolerate some of the short term volatility.
Please reach out to us if you would like to discuss this further.
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