Market Update | October 26, 2018

The markets have been experiencing significant volatility recently.  We look at recent disturbances as confirmation of our model’s conservative signals.  Our models do not yet suggest that this will turn into an enduring material decline.

It is not uncommon for investors to feel anxious when markets experience rapid declines in price.  We take comfort that our models have acted proactively to date and continue to be stable in their conservative, yet not dire, stance.  Our credit markets factor is not, at this time, showing stress.  When emotions get high, it is helpful to step back and look at economic fundamentals.

Negatives

1. Slowing economic activity in international markets
2. Lackluster US home sales
3. Currency depreciation in emerging markets

Uncertainties

1. Escalation of China trade disputes
2. Italy fiscal situation and its impact on the European Union
3. US political environment

Positives

1. Strengthening US private wages and strong consumer spending (Main Street is increasingly comfortable while Wall Street gets concerned)
2. Strong business investment environment which typically leads to better economic growth (CEOs are not pulling back on investments as of today).
3. U.S. banking system is under levered making a systematic event much less likely.
4. Equity valuations are above normal but not by much.

We need to keep in mind that when looking at historical 6-month returns, the markets experience positive returns about 80% of the time.  Conversely, the market experiences a 6-month loss about 20% of the time.  It has been less than 5% of the time the market will experience a longer-term bear market.  Our models, at this time, suggest we are in a period of heightened volatility, which placed our portfolios into a conservative posture. However, our signals do not indicate we are entering a lasting bear market and a fully risk-off stance is not yet appropriate.

Please call if you would like to discuss further.