Market Volitility

Fall has finally arrived and truly welcomed as temperatures soared this past summer. Many of us suffered through all time heat records. I wish I can tell you markets were just as hot, but the volatility in equity and bond markets have continued as US-CHINA trade negotiations are still not resolved, the media continues to hype recession fears, whistleblowers, impeachment threats ,those crazy negative interest rates and the central bank lowering its benchmark overnight lending rate.

The US labor market remains strong. Nonfarm payrolls rose 136,000 in September, which was slightly less than the consensus expected 145,000. However, at least a few reasons suggest faster job growth in the final quarter of the year.

The best news was the drop in the unemployment rate to 3.5%, the lowest level since the New York Jets and Joe Namath were reigning Super Bowl champs (that’s 1969 if you’re a Millennial, or younger). Meanwhile, the employment to-population ratio (the share of those age 16+ with jobs) increased to 61.0%, the highest since 2008. The labor force participation rate remained at 63.2%, tying the highest level since 2013.

While this expansion has experienced the slowest real GDP growth since 1950, we believe that the slower rate of growth will allow for this one to last longer. The first quarter of 2019 came in strong at 3.1% and the second quarter at 2.1% indicating no recession. A traditional way of defining a recession is two consecutive quarters of negative real GDP; we have not experienced one negative quarter just a slowdown in growth. This past summer many of the high flying cloud technology and internet stocks began to lose strength and most recently there has been a shift from growth stocks to value stocks. This shift is normal in a late cycle expansion.

The threat of a recession is on the minds of investors. Some traditional measures of the yield curve are inverted and, in the past, those have preceded recessions. The link between an inverted yield curve and a recession has so dominated recent financial news that for some investors it’s no longer a matter of whether we get a recession, but how long until it starts.

What these investors are ignoring is how different recent circumstances are from the environment that preceded prior recessions. Think about the Panic of 2008. The bubble in home prices in the prior decade pushed national home values more than $6 trillion above “fair value” (based on the normal relationship between home prices and rents). At the time, that over-valuation was the equivalent of about 50% of annual GDP.

The process of unwinding that massive over-valuation happened when bank capital ratios were significantly lower than they are today. And, more importantly, the unwinding happened when banks had to use overly strict mark-to-market accounting standards that required them to value mortgage-related securities at “fire sale” prices regardless of how solid the actual cash flow was on many of these instruments. Many agree that housing isn’t grossly overvalued like it was in the years before the Panic. But some think we now have overvaluation in the stock market. However, the S&P/Case-Shiller U.S. National Home Price Index based on the index national home prices are much higher today than the panic of 2008 and the Shiller PE ratio for the equity markets also show slight overvaluations and currently the PE ratio for the S&P500 is above historic averages. The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.

We live in a world where financial news is broadcast 24/7, whether on the television or any of the other forms of media that have emerged. Because of this, the negative catalysts and fear of loss is magnified, making it less likely for it to ever feels safe to invest. With low interest rates, it is expensive to hold cash. Money market instruments are currently paying a little less than 2%, but that could continue to fall if the FED cuts interest rates further, which we expect them to do. Meanwhile with inflation around 2%, cash on the sidelines barely breaks even. Investors should continue to weigh the risks of losing purchasing power in addition to the risk of losing principal.

As an investor’s time horizon increases, the importance of market timing decreases. Historically speaking, stocks (measured by the S&P 500) have outperformed bonds and cash over longer time periods. However, there is no free lunch and there is a price to be paid for the potential extra returns. While stocks can generate higher returns than bonds over time, with those returns come greater risk and inherent volatility. We believe that with a long-term financial plan, the daily/weekly headlines can be less scary.

You should remain focused on your investment goals and objectives. If you have any questions or concerns with your current asset allocation and/or investments please do not hesitate to contact me.

I believe every solid relationship should center on open communication. You have several options to access the information you need to know about your portfolio, my firm, Raymond James and the financial markets. In addition to our in-person meetings and one-on-one calls, we’ll also communicate with you through other channels, such as our website, newsletters and social media. You have already been receiving regular updates and emails from me. These communications are designed to provide you with insight into the ever-evolving financial markets and help build the confidence that comes from working with an experienced advisory team. If you haven’t already done so, I encourage you to go to my website to learn more about my firm and access some of the recent research and articles available to you. I also utilize social media channels such as LinkedIn. If you already have an account on LinkedIn consider following me. These channels provide an excellent way for me to keep you up to date with relevant, timely news. Please let me know how you prefer to receive important communications and how frequently. We’ll do our best to deliver. Guiding you toward financial independence is a collaborative process, and I hope you feel comfortable reaching out to me whenever you have questions, concerns or even new ideas to help me better serve you.

Regards,

Elliot Weissmark, CFP®
Senior Vice President, Investments

Any opinion are those of Elliot Weissmark, CFP®, CPFA and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index is a composite of single-family home price indices for the nine U.S. Census divisions and is calculated monthly. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise.