I hope you are having a great Thanksgiving week!
I wanted to take this time to address the stock market correction we have been experiencing since the end of the third quarter. Up to that point, growth stocks were significantly outperforming value stocks and the broad market in general. While the entire market has gone down since the beginning of October, growth stocks have corrected further. This is par for the course considering their outperformance and that investors who must stay fully invested, tend to hide in areas expected to go down less than the market, such as consumer staples, utilities and selective healthcare companies. Our strategy has always been to own companies we believe have the potential to grow, otherwise we’ll just raise cash for risk aversion.
The current issues concerning the market are mainly the Federal Reserve and trade negotiations with China.
Regarding the Fed, there are concerns that the Fed is being too aggressive with their plan to continue raising interest rates to a neutral policy stance. The perception in the market is that, although we are ten years past the 2008 financial crisis, the neutral policy rate should be lower than their historical level because the world economy is still struggling with the recovery. We believe those concerns are reflected in the flattening of the yield curve, which is the difference between short-term and long- term interest rates. If the market believed the economy could support much higher interest rates, we would certainly see long- term yields higher than today. Expectations are very high for the next Fed meeting in December. I believe the prospects of a stock market rally are high, should they indicate they are taking a wait and see approach to further rate increase.
Regarding China, the concern is that if the tariffs remain in place, companies will experience profit margin compression if they cannot easily pass on those cost increases to customers. This weekend’s Asia-Pacific Economic Cooperation group meeting in Papua New Guinea was clouded by the simmering U.S./China trade tensions and concluded without issuing a joint communique. President Trump and President Xi are expected to meet at the G20 meeting in Buenos Aires next month, but expectations are low for an agreement so any thawing in negotiations should be viewed positively.
My view is that we are in a correction of a market that got overheated. I base this on the fact that although the economy is expected to grow slower in the coming year, there are no signs that the economy is heading towards a contraction.
Unless, something significant happens to change our outlook, our strategy is to sell companies whose fundamentals have deteriorated and look to reinvest in companies with strong or improving fundamentals. Since many stocks have been damaged in this correction, I don’t suspect that all will rise should the market rally. We will be on the lookout for companies we believe that will not only participate in a market rebound, but have opportunity for growth over the next year.
Market corrections are never fun, but I want you to know that we are closely monitoring the situation and will keep you apprised of any major developments.
Please have a Happy Thanksgiving with your loved ones and feel free to contact us with any question or if you’d like to review your portfolio.