October lived up to its reputation as one that is hazardous to investors. The major stock indexes were off approximately 7 – 9 percent. The question on everyone’s mind is whether this is a typical bull market correction (expected about every 18 months) or is this the beginning of a bear market (which occurs on average every 3 ½ years and has at least a 20 percent decline.) Bear markets often start 6 months before a recession or when there are asset bubbles. Since the latter is not the case, are we close to the seemingly long overdue recession? With all the recent stimulation of the economy, most economists don’t expect a recession until at least 2020. Rising interest rates, an increased trade war, and a slowing global economy are issues that could negatively affect our economy. However, stock valuations currently are still quite favorable compared to bond valuations.
October tends to be volatile because of historic fears (dating back to the crash of 1929) and because many large institutional investors tend to reposition their holdings. This volatility can cause some investors to sell and raise their cash positions. However, capital needs to find a home and money markets and CDs returning 2 – 3 percent annually are unlikely to satisfy the needs of long-term investors for very long. In the absence of a recession, corporate earnings will continue to rise albeit at a slower rate than this year’s earnings growth of over 20 percent. Therefore, there is the case that markets can continue to rise.
Most likely, 2019 will be at least as volatile as 2018. It is important to make sure that one has enough cash and shorter-term bonds to weather the average three to four years it can take a true bear market to recover. Remember that investing in stocks is for long term wealth generation not short-term wealth generation. Markets have always recovered, panicky investors sometimes do not.
This letter represents the opinion of John D Quimjian as of November 3, 2018.
John Quimjian is an investment advisor representative with Physicians Wealth Solutions LLC, a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein.