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I wanted to briefly address the recent pullback in the stock market with some observations that I have made. To me, the evidence points to a normal, healthy pullback in stock prices. The stock market, as measured by the S&P 500, is down over 5% from its recent highs. I believe that this is the first pullback of that magnitude since February of 2016, so it’s been quite some time. The market has historically experienced a 10% pullback about every year, on average, so we shouldn’t be surprised to see this. In my opinion, volatility and unpredictability are our allies, as stock investors. Without volatility, I don’t think we could expect to earn as much on our investments. Generally, riskier assets, like stocks, have had higher returns, while assets with less risk, like CDs, have not had to pay as much to incentivize buyers. So, more volatility ought to mean more returns for stock investors, and that has been the case, historically.

I believe that this pullback has been precipitated by the recent climb in bond yields and interest rates in general. The 10-year Treasury bond yield closed Friday at 2.85%, up from 2.40% at the end of 2017. The yield has climbed by nearly a fifth (a 20% move upward in yield) since the beginning of the year. This means that many asset managers, and I’m thinking of pension funds in particular, are looking at their portfolios and thinking that a 2.85% return on a low-risk investment is certainly more attractive than the 2.4% they were contending with a month ago. They are probably considering taking some of the gains they have made in the stock market, which had climbed somewhere around 50% since all that volatility in February of 2016, and reposition that to bonds. So, I think this has been a case of repositioning some money from risky assets like stocks, and into less risky assets like bonds.

Corporate earnings are the lifeblood of stock prices, and I don’t think this is a case of concerns over earnings, which have been great and which look to continue to climb. As of February 1, 82% of S&P 500 companies have beaten on the bottom line (quarterly earnings) and 81% have beaten on the top-line (quarterly revenues). In aggregate, earnings have grown at a reported 15.4% rate on sales growth of 8.7%. Also, 1Q18 earnings estimates have been revised higher, now expecting 16.9% growth (up from 11.0% on 12/31/17); and full-year 2018 earnings estimates have also been revised higher, now expecting 17.2% growth (up from 10.8% on 12/31/17), according to Mike Gibbs, the Director of Equity Portfolio and Technical Strategy at Raymond James. So, it doesn’t seem that poor corporate earnings are to blame for the selloff. My understanding of the research from Scott Brown, the Raymond James Chief Economist, is that the economy is doing well, so much so that inflation may be coming back into our system for the first time in quite a while. I haven’t read anything from him leading me to believe that the economy is weakening, and nothing that indicated that it is too strong, so I don’t think that the economy is to blame for the pullback. It looks like GDP estimates (a measure of the overall economy) for 2018 have been revised higher by economists, on average, to expected 2.7% growth this year, according to The Wall Street Journal’s Economic Forecasting Survey. That seems good to me, to have an economy that is growing at a reasonable pace, with a pickup in that growth expected.
The many measurements that I also follow, such as investor sentiment, railcar loads, consumer confidence, interest rates, seasonality, and others, indicate to me that while the market may in fact be slightly overvalued on a fundamental basis, that there are enough tailwinds for us to expect moderate growth in the S&P 500 for this year. For me, this recent pullback has been a healthy trimming, getting scared money out of stocks, which may lead to a more sustainable bull market.

As we often say at times when risk is re-introduced to stocks, now is a great time to evaluate your personal risk appetite. If the pullback in stock prices recently has you too jittery, then maybe you should consider whether stocks are the right investment for you. On the other hand, if this pullback looks like a buying opportunity to you, then you may be well suited for stock investing. Consult your Signature Life Plan to see if this pullback has had any impact at all on your ability to achieve your goals. If you haven’t had us prepare a Plan for you, I strongly encourage you to do so. From an investment standpoint, it can help you determine what investment allocation is right for you, in that its goal is to help you achieve your financial goals with as little risk as necessary. Aside from that, it is a great way to help you to prioritize not only your financial goals, but also your life goals.

As always, these recommendations are mine, and may or may not be the same as those of Raymond James. This is not a solicitation to invest, although we do invite you to review your portfolio with us to see if any changes should be made.

Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk including the possible loss of capital. Asset allocation and diversification do not guarantee a profit nor protect against loss.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Individuals cannot invest directly in any index. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Scott Mitchell and not necessarily those of Raymond James.

 

 

Scott Mitchell
Chief Investment Officer, SWS
Senior Wealth Advisor, RJFS

135 South Dargan Street | Suite 200 Florence, SC 29506
888.838.2844 – Office | 843-519-1100 – Office | 843.519.1121 – Fax
scott@signaturewealth.com | www.signaturewealth.com

 

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