Update on Current Market Conditions - October 30, 2018
October has provided us with the third 10% correction in U.S. equity markets this year. Markets are deemed to be in correction for downward moves of 10% - 20%; bear markets are defined as sell-offs of more than 20%. We are not in a bear market. I realize, however, that market sell-offs present unique stresses for families in general and especially for those families in or approaching retirement, so I wanted to share some current market numbers with you and to also explain how we see markets progressing between now and year’s end, and into early 2019.
Through mid-day last Friday, and for the year, the New York Composite Index was down -9.9%, the Value Line Geometric Index was down -8.9%, and the Emerging Markets Index was down -19.1%. Year to date, Corporate bonds were down -7.1%, and Gold (which is up over 3% here in October) was still down -6.5% for the year.
Additionally, for the month of October through mid-day Friday, the S&P 500 was down -10.2%, the Mid-Cap 400 was down -12.7%, and the Small-Cap 600 was down -14.1%.
As we entered 2018; we were concerned about overvaluations in the Tech and Financial sectors, and chose to favor value stocks over these sectors; value names that were not over-bought, had low debt, and also had decent dividend rates. We have been hurt in this area by talks of trade wars and the strong dollar, which have hampered these companies’ exports and also their profits from international operations.
We believe that value stocks are beginning to re-assert strength here, with the Tech sector - where we are under-weighted – now showing significant signs of weakness. For example, the Semi-conductor group was, on Friday, down -22.6% from its high, and down -8.9% for the year; Facebook was down -20% for the year and down -35.8% off its high; Amazon was down -25.9% from its high; Netflix was down -33.4% from its high, and Google was down -20.4% from its high….These stocks make up the “F-A-N-G” stocks, which have provided 60-70% of the market’s gains over the last three years, and it seems, that for these companies, the bloom is off the rose. Fortunately, none of these names pass our screens; therefore, we don’t own them for you.
We also remember this past March, President Trump – referring to his decision to take on the unfair trade practices of other countries vis-à-vis the United States – saying that it may hurt us a little in the short run, but it will be much better for us in the long run. We believe this is true. We have already seen new, more equitable trade deals being worked out with Europe, Japan, Mexico, and Canada, and in that China’s economy has been disproportionately hurt by talks of increasing tariffs, we expect to see similar progress with China after the election. (Before then, China will not want to do anything to help incumbent majorities in Congress). This eventuality should prove good for US stocks and stock funds.
The election itself, with all that is at stake, is also leaving a temporary cloud of indecision over investment markets. This cloud goes away in 7 days. If the GOP holds the House, which is by no means reflected in current equity values, the anticipated post-election rally may well be significant.
Lastly, we have seen this year - as never before - heads of major banks and investment firms talking down the markets. At least two such corporate leaders also allowed their names to be floated as potential Presidential candidates for 2020. Talk like this will also dissipate after next week’s election.
We believe market performance will be back-end loaded this year for all the above reasons. We have plenty of cash and short-term US Treasuries to put more money to work for you after the election, and we look forward to doing so in the belief that many of our current holdings are under-valued and that we will be able to purchase growth positions at significantly lower prices at that time.
Gary W. Wood, CFP®
President, BDC Capital Management
BDC Capital Management, Inc. is an Independent Financial Advisory Firm.
**The information contained in this newsletter does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of BDC Capital Management, Inc. Expressions of opinion are as of this date and are subject to change without notice. BDC Capital Management may in the normal course of business have a position in any securities mentioned in this newsletter. Any stock price mentioned is quoted as of the date of this newsletter. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors. Past performance may not be indicative of future results. Keep in mind that individuals cannot invest directly in any index. Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated. There is no assurance that technical analysis or any strategy will ultimately be successful or protect against loss.