**Client Note: The market has very quickly fallen to levels where our indicators are starting to flash. The fact that they are at this point with what is really a very small selloff is a testament to what can happen very quickly. For portfolio updates and changes please log into the Client Only blog at http://www.401Advisor.com. For a password either call the office for Michelle or send me an email at: bill@401advisor.com.
Since the market peak in September it has dropped about 9% through Wednesday October 24th. Remember that based on history, the market will drop 10% once a year, 20% once every three years and 40% or more every ten years. These are averages. The market did not see a 40% drop from 1980 through 1999, but then suffered two from 2000 to 2010. If this dip hits -10%, it will be for the second time this year.
Normally at this point I write about this being way too early to read anything into this drop more than the usual volatility, and as I termed it in the spring “a hissy fit”.
This time is a little different. While all the bull signs are still in place, there is one very big difference. There is only one thing that ultimately matters to stock investors and that is earnings. And more specifically the direction of earnings. While next year’s earnings will most certainly be positive, expectations are that growth will be about 1/2 of what we saw this year. That is expected and considering the massive boost corporations received from the tax cuts, 1/2 really isn’t so bad. But with reduced expectations comes legitimate worries.
At 17% earnings growth (expected for full year 2018), companies can absorb the hits from tariffs, higher wages, higher oil costs, higher interest rates…. But at 8% – 9% growth (expected in 2019) there is far less cushion to absorb the hits to earnings and maintain the growth that goes with current valuation levels. 2019 will be a tug of war between continued economic stimulus from individual tax cuts and the fore-mentioned negatives. Volatility will be back.
What does this mean now? Normally I would brush this off. But times aren’t normal. I have alluded to before, and will try and devote a significant blog to the subject, liquidity is drying up. What this means is that when selling starts it can snowball fast. And we have seen a hint of this over the last couple of days. While I think a rebound is probable, if instead we see a continuation of the selling we could be at -20% or more very quickly. This can be a good test to any investment strategy.
Bill DeShurko 