October 25, 2018
From October 3rd through yesterday, October 24th’s, close, the S&P 500 lost approximately 9.2% of its value. This negatively impacted the majority of our clients’ portfolios and concluded, what we believe, is the third “retest” of the February 2018 lows. This short-term move down ended close to the classic definition of “correction” – a 10% decline – and we believe marks a new support level for strong movement upward over the next few months and years. These types of movements, particularly when they occur in a short period of time (22 days), can be unsettling. Please remember that, in every long-term bull market, two to four corrections of 10% per year are commonly experienced.
In many cases, you see investors fleeing to, what many see as protection of their monies, government bonds. For this reason, we have attached an Ibbotson chart with this letter. This chart, produced by our third-party econometric firm, Morningstar Inc., reiterates our investment beliefs. Although you do see these market corrections evidenced on this chart, the best investment for your capital, long-term, is in the equity markets. This chart is proof that, in short-term and long-term periods of times, equity markets work best!
I think folks may have forgotten that volatility and short-term corrections are normal because 2017 was such a stable year for equity investors. So, nothing really has changed in terms of market volatility – we have just seen a return to “normal” volatility. With this downward movement, this year’s gains have largely been erased. It is our firm opinion that we are likely to see double digit gains during the last two months of this year. As I write this letter, the S&P 500 Index is currently up 1.79%* today. This bounce off of yesterday’s low is, in our opinion, very likely to continue with much stronger than normal movements in the months and years ahead. Please, recognize the normality of markets retesting previous lows, like the February 2018 low was retested in October. Do not shy away from normal market movements in a macroeconomic environment where it is clear that the American economy may have never been stronger than it is now, by almost any economic measurement.
Now that third quarter’s earnings numbers are being released, we are seeing continued trends of higher than expected corporate earnings and, in most cases, higher expected revenues. That is occurring around a backdrop where we have settled trade disagreements with South Korea, Japan, Germany, Mexico, and Canada. Also, we believe that we are almost settled with the European Union. That puts continued great economic performance by individual companies in a very different light because it happened during a time of tremendous trade disagreement. With a remarkable trade block coalition that America has built this year, and with the inevitable agreement that will be reached (in the near term) over the trade issues with China, doesn’t it make sense that American multinational companies are likely to see an even greater boost going forward from the trade dispute settlements that have already occurred along with those that have yet to occur in the European Union and China?
Against that backdrop, please, also, consider the projections that we made in our August 30, 2018 newsletter. While every political pundit has clung to the view that conservatives would lose the U.S House on November 6th, we believe even more now that Republicans are likely to hold the House. The Senate, which we have stated prior, is likely, in our view, to see a pickup of three to four seats, at a minimum, but could actually pick up five to seven. That would give the conservatives in the U.S Senate a near supermajority. A less divided House and Senate is likely to further our current administration’s policies of free and fair trade, protecting our borders against criminals who intend to enter illegally, against drug smugglers who are poisoning our nation and its youth, and against terrorists, who know our southern door is wide open for whoever wants to walk in. This scenario also opens up a Congress who is much more favorable towards the infrastructure project, which we have discussed for the last two years. That project is favored by both conservatives and liberals in Congress and, at an estimated trillion dollars of spending, would have a net spending effect of nearly six trillion dollars in our $20 Trillion economy. This huge stimulus also provides a much safer and more productive infrastructure for our roads, bridges, and dams, while also providing hundreds of thousands of new, skilled jobs.
America’s brightest days, and brightest economy, are ahead of us. There is no question that, right now, there has been a temporary disconnect between what is actually happening in the underlying economy and what the markets are reflecting. We believe that disconnect has now ended and we will see a rapid upside movement in the months ahead. We will keep our eye on the ball of what is actually happening in the economy, not the market’s day-to-day vagaries. We will always position your portfolios in a way that is intended to limit your individual downside, while providing a return commiserate with your risk tolerance.
I want to say, unequivocally, this is a good time to be an American, and an investor in America. If you have additional capital, please consider committing it now! It seems that, at times of maximum angst, we find the best potential returns for investment. Yesterday was a period of tremendous angst amongst most market participants.
Lastly, it is a privilege to be able to serve your investment needs. I, and my staff, never lose sight of that simple fact. We are here to help ensure that your financial future is bright. Remember, in life, patience is always rewarded, and fear always debilitates. This, too, shall pass (and we believe it already has) and you will see an even brighter economic environment unfolding in the months and years ahead. Feel free to call me personally, or any of our staff, if you have any questions. Thank you for your trust in us and God bless.
C. Kelly Buckley, MBA, CFP
Managing Director for Asset Management