Why did the stock market fall when the economy is doing well?
The answer is that one reflects the past and the other anticipates the future.
Last Friday’s advance estimate from the Bureau of Economic Analysis showed the U.S. economy grew 3.5 percent during the third quarter of 2018, which beat expectations of 3.4 percent. Consumer spending, which accounts for two-thirds of GDP, grew by a whopping 4 percent. The only weaknesses in the strong report were business investment and trade. Business investment only grew at 0.8 percent, and the trade deficit widened as firms likely increased orders from China in advance of tariffs being implemented. Harriet Torry of The Wall Street Journal reported:
“The economy powered ahead in the third quarter, driven by robust consumer and government spending, though Friday’s report included warning signs that the business sector faces turbulence that could hold back the expansion in the months ahead.”
Third quarter’s economic growth was slower than economic growth during the second quarter and stronger than economic growth during the first quarter of 2018.
Economists refer to economic growth as a ‘lagging indicator.’ It is a measure that may help confirm longer-term trends, but offers little information about the future.
The stock market reflects what investors think may happen over the next few weeks or months. The volatility we’ve seen during the past two weeks suggests investors are uncertain about what may be ahead. Many factors are contributing to uncertainty. For instance, investors are concerned:
- The U.S. economy may grow more slowly. Economic growth slowed during the third quarter and investors are uncertain whether the trend will continue through the remainder of 2018 and into 2019.
- Negative earnings guidance from companies. Corporate earnings growth was robust during the third quarter. Through Friday, almost one-half of companies in the
- Standard and Poor’s 500 Index had reported earnings and their blended earnings growth rate was 22.5 percent, according to FactSet. However, despite strong earnings growth, many companies’ shares lost value. One reason is a fair number of companies have issued negative guidance indicating earnings may be weaker in the future.
- Trade tensions could slow global growth. While trade disputes with Mexico and Canada have been resolved, trade issues between the United States and China remain. Al Root of Barron’s reported:
“Now, on third-quarter calls, companies have begun to spell out tariff impacts in greater detail. Calculating the ultimate impact of tariffs isn’t easy or precise. A fair calculation would include not only costs but also changes in demand and the possibility of supply-chain disruptions. The result could be significant. The International Monetary Fund lowered its global growth expectations when it released its recent outlook because of, in part, ‘escalating trade tensions.’
- Federal Reserve rate hikes could slow economic growth too quickly. The Fed has begun raising the Fed funds rates, encouraging interest rates higher, in an effort to keep inflation in check. Some are concerned the Fed may raise rates too quickly or too high and choke economic growth.
- Midterm Elections. Every two years uncertainty increases as we approach election day.
You have probably heard the saying, “Markets hate uncertainty.” Recent volatility seems to be the result of uncertainty and it is possible uncertainty will cause stock markets to bounce around for some time.
When stock markets are volatile and headlines describe the action with words like ‘plunge’ and ‘erase,’ it’s easy to let emotion get the better of you. Before making changes to your portfolio, please give us a call. We can discuss your concerns and any changes you would like to make to your long-term financial plan.
Key points for the week
- The S&P 500 has fallen almost 10 percent from its high reached in late September.
- Stick to your plan during market declines and periods of uncertainty.
- U.S. GDP (gross domestic product) grew an impressive 3.5 percent last quarter.
- Consumer spending which accounts for 68% of the U.S. economy rose at a 4% annual rate in the third quarter.
Five Tips for Surviving a Market Downturn
When times get tough, we turn to five keys to surviving a market downturn. They offer a guide to weathering declines like the one we have seen recently. A summary of our views is included below:
- Keep the Fundamentals Foremost
The fundamentals remain strong for investors. As GDP data indicates, the U.S. economy continues to hum along and corporations continue to generate excellent profits.
- Know the Possible Causes of the Downturn
This downturn seems more the product of uncertainty in many areas than a tangible risk in any particular area. We see the following as key issues raising uncertainty and contributing to the downturn:
- Trade: Chinese trade negotiations have stalled, and the tariffs are affecting Chinese economic growth and some corporate results.
- Slowing economy: The U.S. economy is slowing slightly, and investors are uncertain that trend will continue in 2019.
- Rate increases: Investors are uncertain if the Federal Reserve will keep raising rates in a slowing economy, potentially leading to a recession.
- Corporate earnings: A fairly small number of high-profile companies have missed results or guided expectations lower, raising the uncertainty associated with equity investing.
- Volatility Comes in Clusters
Once markets become volatile, they tend to stay volatile for a while. Get used to these larger swings.
- Eliminate “Points” and “Dollars” from Your Vocabulary
Think in percentages, not points or dollars. A decline of 600 points in the Dow doesn’t mean nearly as much as it used to. Investors often talk about gains in percentages but declines in terms of dollars. As the market has gone up, your portfolio has likely grown. You may be experiencing a slightly larger loss in terms of dollars for the simple reason you are wealthier than you used to be.
- If You’re Going to Make any Changes, Be Strategic About Them
Please consult your advisor before making changes to your portfolio and make sure any changes fit into your plan.
What are we reading?
Below are some articles we paid particularly close attention to this week. We encourage our readers to follow the links.
Starting next year, there will be big changes to how FICO credit scores are calculated. FICO scores will begin considering the management of your bank accounts (savings, checking and money markets). Estimates are that the changes will increase the credit scores for millions of borrowers and also benefit those that previously had no credit history.
A dog named Princess has been accused by her owner of “gold diggin’” at McDonald’s. Betsy Reyes, Princess’s owner, says Princess has been caught numerous times escaping her home and heading to the local McDonald’s. Pretending to be a hungry stray, Princess guilts people into feeding her hamburgers. Reyes has asked people to stop feeding her dog.
Is that a fact?
A recent Pew Research Center survey found younger people (ages 18 to 49) were better able to distinguish facts from opinions than older people.
Jeffrey Gottfried at Pew reported, “About a third of 18- to 49-year-olds (32 percent) correctly identified all five of the factual statements as factual, compared with two-in-ten among those ages 50 and older. A similar pattern emerges for the opinion statements. Among 18- to 49-year-olds, 44 percent correctly identified all five opinion statements as opinions, compared with 26 percent among those ages 50 and older.”
Pew concluded younger Americans, especially millennials, were better able to distinguish fact from opinion than older Americans because young people tend to be more digitally savvy and also tend not to have a strong affiliation to either political party.
If you’re ready to test your acumen, visit the Pew Research Center website and search for ‘Quiz: How well can you tell factual from opinion statements?’
Halloween Jokes for Children
If trick-or-treating in your neighborhood requires a trick to get a treat, your little ghosts and goblins will need some short and easy-to-remember options. Here are a few that were recommended by Reader’s Digest:1
- What has hundreds of ears but can’t hear? (A cornfield)
- Which fruit is a vampire’s favorite? (Neck-tarine)
- How do you fix a damaged jack-o-lantern? (With a pumpkin patch)
- What do ghosts wear when their eyesight gets blurred? (Spook-tacles)
- What do witches ask for at a hotel? (Broom service)
Being prepared for what’s ahead is always important. If you have family members or friends who could benefit from financial planning, please let them know about the services we provide.
We wish you a Happy Halloween full of treats and good fun!
Yesterday is gone. Tomorrow has not yet come. We have only today. Let us begin.~ Mother Teresa
Either do or do not; there is no try.~ George Lucas, Movie Director
I never considered a difference of opinion in politics, in religion, in philosophy, as cause for withdrawing from a friend.~ Thomas Jefferson, 3rd American President
It's what you learn after you know it all that counts.~ John Wooden, Basketball Coach
Links & Disclaimers
RJFS and SPC do not offer or provide legal or tax advice. Tax services and analysis are provided by the related firm, S&M through a separate engagement letter with clients. Portions of this newsletter were prepared by Carson Group Coaching. Carson Group Coaching is not affiliated with RJFS, SPC or S&M. The information contained in this report 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. This information is not intended as a solicitation of an offer to buy, hold or sell any security referred to herein. There is no assurance any of the trends mentioned will continue in the future. Any opinions are those of the author and not necessarily those of RJFS. Any expression of opinion is as of this date and is subject to change without notice.
Opinions expressed are not intended as investment advice or to predict future performance. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Past performance does not guarantee future results. Investing involves risk, including loss of principal. Consult your financial professional before making any investment decision. Stock investing involves risk including loss of principal. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock companies maintained and reviewed by the editors of the Wall Street Journal. Please note direct investment in any index is not possible.
The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks. Investing in emerging markets can be riskier than investing in well-established foreign markets.
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