What's Going on with the market?
The U.S. equity market (as measured by the S&P 500 Index) declined approximately -10% since September 30 (start of Q4). While certainly worrisome in the short-term, not unexpected. Stocks are feeling pressure from increasing interest rates, mixed earnings reports and international trade disputes. Other concerns such as slowing global growth and Brexit negotiations are also present. These forces appear to be particularly magnified in the midst of what has been an expensive stock market that our indicators have been signaling for some time.
Despite these events, it's important to have perspective. These declines occur almost annually and it's key to distinguish between headline reactions and real bear market risk... An important concept to share about our market exposure forecasting is that we are not trying to solve for the -10/-15% declines. President & CEO Dan Kraninger wrote about these pullbacks in the recent quarterly newsletter (September 30, 2018) to clients.
"...they happen every year, are likely surprise events (I call them trap doors), and often don't have long term implications. That's the key to the Navigator (referencing NorthCoast's monthly equity outlook) - distinguishing between the routine -10% decline and a nasty bear market. Every year has declines (see below). In fact, the average intra-year decline for the last 40 years is -13.8% (see chart below), and yet a majority of those years still turn out to be positive. Whenever I hear people concerned about -10% declines or trying to avoid these trap doors, I know they rarely ever make any money because they are always hiding in cash..." you can read dan's entire message by clicking here.
Source: Factset, Standard & Poor's, J.P. Morgan Asset Management. Returns are based on index only and do not include dividends. Intra-year drops refer to the largest drops from a peak to a trough during the year. For illustrative purposes only. Returns shown are calendar year returns from 1/1/1980 - 9/30/2018.
Market Moving Indicators are Neutral
We are cautiously optimistic about the market rebounding after the current volatility. The optimal word is “cautious” as we have held a significant amount (15%-30%) of cash for months and we are now holding a 35% cash position in our tactical U.S. and international equity strategies. From this position we believe we are adequately prepared to weather the current volatility and have enough liquidity to act on opportunities that may arise from market pullbacks.
To get more specific, our sentiment and technical indicators have softened with long-term momentum slowing. However, valuations look more attractive at the moment and macroeconomic indicators remain strong with little change in the optimistic U.S. economic outlook despite a flattening trend of the yield curve.
We know the recent market move is disconcerting and it is easy to get caught up in the bear market sentiment that is often driven by media outlets during volatile market action. But it is vital to stay disciplined. Our goal as an investment manager is to differentiate between short-term corrections (5%-15%) and the bear market risk (20%-30%). Our data at this time still indicates the former. Consider some recent significant price declines for perspective. All instances displayed quick, rapid market declines coupled with high levels of fear and uncertainty.
The Plan Moving Forward
As always, we allow data & discipline to drive our decision moving forward
- Execute stop losses when the risk outweighs the future return potential.
- Strategically increase market exposure to stocks displaying the most attractive return/risk ratios.
- Continue to monitor the market daily and adjust accordingly.
If you have any questions about recent market events or your investment plan, please contact your NorthCoast advisor or call 800-274-5548.
As of 12/6/2018. Data provided by Bloomberg, NorthCoast Asset Management.
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