By: Deron McCoy, Chief Investment Officer
CFA®, CFP®, CAIA, AIF®

That’s the ‘all caps’ headline the media will use for shock value, hoping to lure you into reading their article or clicking their ad – a shameless attempt to profit off your emotions and fears. But don’t be fooled. The truth is, with the Dow having soared to 25,000, a drop of 831 points on October 10th, 2018 amounts to a mere -3.15% selloff. That doesn’t even rank in the top 100 of percentage point declines. Back in November of 2008, an 800-point decline would have been closer to -10%; a far more significant event than this.

Why did the market selloff?

As the calendar turned to October, the markets shifted focus to earnings season as companies began reporting their latest results. On Tuesday, Briefing.com noted that “PPG Industries (PPG) checked off a lot of earnings-warning boxes that will play into concerns about hitting/nearing peak earnings growth. Specifically, PPG blamed cost inflation, softening demand in China, and weaker automotive refinish sales in Europe and the U.S. due to lower end-use market demand.” Adding to investor angst, “the IMF lowered its global growth outlook for 2018 and 2019 to 3.7% from 3.9%, citing in part the retardant of trade actions and trade uncertainty. The downgraded growth forecast isn’t jarring, yet it plays right into the concerns of late pertaining to the prospect of a growth slowdown due to tariff actions and rising interest rates. In other words, it’s something that will fuel the debate about the U.S. economy hitting/nearing peak growth.”

Amid all this talk of weaker growth, President Trump reiterated his stance that he’d prefer the Fed not raise interest rates at this point. In fact, he went on record Wednesday stating that the Federal Reserve has ‘gone crazy’ by continuing to raise interest rates. This puts Fed Chair Jerome Powell in a tight spot as he has insisted that the Fed is independent. So now the Fed seems boxed in. If they don’t raise rates, they are not independent. If they do raise rates, they might be hiking in the teeth of peak growth which is not stock-friendly—and thus the selloff.

We believe that this too shall pass. But it might take some time – as investors must get thru November’s election and December’s Federal Reserve meeting, where the Fed will face another decision as to the path of short-term rates.

So, while the media tries to frighten you, the truth is 3% selloffs happen in nearly every bull market. In fact, the Dow Jones already dropped 1175 points this year, back in February when the index was 1000 points lower. For some reason, however, many investors (and the media) tend to obsess on the short-term negative rather than looking at things in context. Wise investors, on the other hand, always keep market moves in perspective. While the Dow did lose 831 points today, it was also up 887 points from August 15th to August 27th and then up another 780 points from September 17th to October 3rd! Market corrections are not only normal but healthy – removing a level of froth that could cause a bubble. Since 1980, the average S&P 500® annual peak-to-trough decline has been around 13.8% but that includes recessionary years. Even in the last 6 years of this bull market, selloffs have averaged 7.8% per year – while markets continued marching to all-time highs. The current 5% selloff, therefore, is average and should be expected.

 


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