STA Weekly Report – Is the Market Selloff Close to Ending?
INSIDE THIS EDITION:
Is the Market Selloff Close to Ending?
Weekly Technical Comment
November is National Family Caregivers Month
401k Plan Manager *Updated on 10/23/2018
In October, the S&P 500 index was down nearly 8%, its worst month since 2009. The markets outside the U.S. didn’t fare any better. It was a synchronized sell-off – global stocks lost nearly $8 trillion in October, the most since 2008. Optimism was replaced by long-absent fear and pessimism in recent weeks, prompted by fears of slowing global economic growth, tightening financial conditions, and a further escalation of trade tensions.
After relative calm through the summer and early fall, volatility reappeared in October. The number of big moves, defined as more than 1% daily change, were the most since March. Investors were unsettled, and the equity markets were looking for directions.
The positive price momentum broke as investor sentiment made a sharp turn into negative territory.
Who should investors blame for the sudden shift?
The Federal Reserve can always make markets uneasy. The fear of rising rates increased when Federal Reserve Chairman Jerome Powell said the central bank is “a long way” from getting rates to neutral on October 3, a fresh sign that he believes more hikes are coming. His comments coincided with the start of the recent broad-based pullback across global markets. After all, asset prices are widely believed to be inflated by an extended period of accommodative monetary policy. Normalization of easy monetary policy needs to be taken with extreme care, and while maintaining a fine balance between avoiding asset price collapse and preventing the economy from overheating. Interest rates in the U.S. are no longer accommodative. The real Fed Fund’s rate recently turned positive after staying in negative territory for a decade. More rate hikes will further increase borrowing costs and compress profit margins.
As a response to higher rate expectations, rate-sensitive sectors entered deep bear markets. Homebuilders and automobile manufacturers got hammered as most sales rely on financing. Higher interest rates make the purchase of cars or houses less affordable. Additionally, the financial sector has been hit hard by lowered expected revenue tied to loan originations.
Ironically, economic fundamentals are still supportive. U.S. GDP growth has been above trend with few signs of overheating. Third-quarter earnings reports are strong. However, the equity market appears to be unimpressed – stock market performance has been decoupled from robust earnings growth this year, with market participants shifting their focus to the sustainability of future earnings growth in 2019 and beyond.
High-flying technology stocks have been hit hardest, with Amazon and Netflix tumbling more than 20% this month. FAANG stocks (Facebook, Amazon, Apple, Netflix, Google) have delivered remarkable revenue and profit growth in recent years in spite of slower global growth backdrops. However, investors are now taking a pause and dialing back earnings growth expectations amid concerns about trade conflicts and the potential disruption they may cause in global supply chains.
From a valuation standpoint, the S&P 500 forward 12-month P/E ratio is the lowest it has been since February 2016 and is in line with its long-term average. Thus, stocks are not inexpensive but are also not expensive either. As Central Bank’s Quantitative Easing depressed bond yields and inflated stock valuations, it is not surprising to see the reverse happen as Quantitative Tightening continues. Although investors are experiencing some short-term pain, these moves restore value in financial assets and help boost longer-term return potential.
From a technical standpoint, the S&P 500 index has dropped below its 200-DMA (daily moving average), for the first time since January 2016. As an important psychological support level, the S&P 500 has bounced back right before it touched the 200-DMA during the January and March 2018 market selloffs. When S&P 500 broke this 200-DMA in 2015 and 2016, it took about 3 months before the index recouped its losses.
Although market volatility has risen this month, current volatility levels are close to average long-term levels. Nonetheless, Investors should take a moment to reassess their individual risk tolerance and that their overall asset allocation will meet their long-term investment goals. Instead of timing the market, a better strategy is to have a well-defined risk management discipline in advance to navigate any future volatility we will see prepare more volatility down the road.
Small and Midcap Stock Indexes Bounce Off February Lows
A lot of technical signs point to a short-term bottom in place for stocks. That suggests that major stock indexes will try to regain some of their October losses. The big question is how much of those losses. Before getting to that, however, let’s review the technical signs for a bottom.
A drop in small and midcap stocks a month ago was an early warning sign that the market was heading into a correction. Those smaller stocks are now bouncing off important support levels formed earlier in the year. Let’s start there. Chart 1 shows the Russell 2000 Small Cap Index rebounding from a level just above its February intra-day low at 1436. On a closing basis, the RUT came within 5 points of its February low. That’s certainly close enough to qualify as a retest of previous support. In addition, its 14-day RSI (top box) is recovering from oversold territory below 30. Its daily MACD lines (lower box) are still negative, but are converging. Those are both positive signs. Chart 2 shows a similar bounce off support taking place in the S&P 400 Mid Cap Index. The ability of those two indexes of smaller stocks to rebound off such important support levels is supporting a rebound in larger stocks as well.
S&P 500 Is Also Rebounding Off Support
Larger stocks are also continuing the rebound that started yesterday near chart support. Chart 3 shows the S&P 500 bouncing off the top of a support zone marked by two horizontal lines drawn under lows formed between February and May. Its 14-day RSI line (top box) is also rising from oversold territory below 30 (see circle). The fact that the RSI formed two rising bottoms over the last couple of weeks is another positive sign. So is the fact that trading volume on yesterday’s price rebound showed a big increase. That’s a welcome change from the recent tendency for volume to drop on higher prices. All of which supports the view that a short-term bottom is probably in place. The question now is how far can it go? That may be determined by a couple of overhead resistance barriers. The first one is its falling 200-day moving average (red arrow). The second barrier is the peak formed a couple of weeks ago at 2816. The SPX needs to clear those two barriers to reverse some of the chart damage suffered during the month of October. Seasonal trends should also turn more supportive as we enter the month of November.
While we have enjoyed a recent bounce, we are still proceeding with caution. Nothing has changed technically since last week’s major technical breakdown that caused the S&P 500 to close below a very important uptrend line that started in early-2016 (Chart 4).
You can see that the S&P 500 is still below its uptrend line, which means that the breakdown is still intact.’
Weekly Snapshot of Global Asset Class Performance
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STA Investment Committee
Luke Patterson, CEO & Chief Investment Officer
Mike Smith, President
Andrei Costas, Senior Investment Analyst (Equity Strategies)
Nan Lu, Senior Investment Analyst (Fixed Income Strategies)
November is National Family Caregivers Month
By presidential proclamation, November is National Family Caregivers Month. Each day, parents, children, siblings, and spouses selflessly sacrifice their time and energy to care for family members affected by illness, injury, or disability. Caregiving can exact an emotional, physical, and financial toll. It is important for caregivers to know that their labors of love are appreciated, and to recognize that they need care and support as well.
Caregiving often involves providing for the needs of our older population. As the number of older Americans rises, so will the number of caregivers. While we take this time to recognize our caregivers, it’s also a good time to consider planning for potential long-term care.
According to recent U.S. Department of Health & Human Services information (www.longtermcare.gov), almost 52% of people over age 65 will need some type of long-term care during their lifetimes. Between the ages of 40 and 50, on average, 8% of people have a disability that could require long-term care services. The average yearly cost for long-term care in a nursing home is about $82,182 for a semiprivate room, while the average annual cost for care in an assisted-living facility is $43,536.
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