By Chad Roope CFA®, Lead Portfolio Manager - Fundamentum
The recent equity market correction has no doubt been uncomfortable. As of the end of year close, the S&P 500 ended the year to date down 6.24%. Concerns about slowing global economic growth, worries that the Federal Reserve is pushing interest rates too far too quickly, fears around the US/China trade war and uncertainties about a US Government shut down have all combined to create downside volatility that we’ve not experienced in a few years.
While we agree this is all concerning and that we are likely to continue to see more volatility in the shorter-run, we do not see an economic recession in 2019 based on the data we see today. US corporate earnings growth is likely to be reasonably strong in the first half of 2019, manufacturing data remains in expansionary readings in the US, US unemployment continues to be at historically low levels, and consumer confidence remains relatively high as well. Those are all good signs as well as the fact that many companies are flush with cash, and the recent tax package gives incentives for them to invest this cash in the economy. When taken as a whole, that leads us to believe that the present sell-off is a necessary flushing of the system and growth stocks that may have gotten a bit ahead of themselves.
In addition, we are coming off a mid-term election, which has historically been good news for markets. According to Ned Davis Research, data going back to the 1946 mid-term suggests things improve after the election uncertainty is behind. The fourth quarter of every election year, followed by the first and second quarters of following year, have seen positive gains when combined in every instance. The worst outcome since 1946 was a +0.40% gain for those three quarters with a median of around an 18% gain, and no losses. We could argue why this time could be different, but we could’ve made arguments about all the other instances as well. There were selloffs like what we are presently witnessing in the other time periods as well. This data may prove to be a tailwind for equities into the new year as well.
Going forward into 2019, we don’t see an extended bear market or recession through the first half of 2019. This is a good time to reassess your financial goals, risk-tolerance and time horizon. If you have excess cash, perhaps consider putting a modest amount of it to work into equities in the shorter run. The back half of 2019 could prove more challenging as we will likely have higher interest rates and the benefits of the tax package begin to fade, so having flexibility in your financial plan and investment strategy will likely prove beneficial as we return to more normal levels of equity market volatility in 2019 compared to the last several years. Investors who are patient, disciplined and stick with their longer-term plan are likely to be rewarded.