By Michal Emory on November 7, 2018
At Hollywood Studios, in Disney World, there is a ride called the Tower of Terror. It is based on The Twilight Zone. You enter an old, abandoned hotel and are guided through a variety of rooms. As you walk through the rooms, you are told a story about how on a dark and stormy night, 5 hotel patrons got onto the elevator and disappeared. Never to be seen or heard from again. You are then directed into an elevator and as the door shuts you sit in pitch blackness.
If it is your first time on the ride, your mind starts trying to figure out what comes next. Suddenly, it feels as if the floor falls out from underneath you and you start plunging down. About the time that you start to worry that you will not stop until it is too late, you not only stop but are thrusted back up in the air as fast you shot down. You keep this alternation of plunging down and rocketing up until you are confident you are about to re-taste your lunch. I thought of this ride during the month of October.
In the 23 trading days of October, the S&P 500 was up or down at least 1% on an astounding 10 days. The S&P 500 finished October down 6.94%. This was the worst month since September 2011 when the stock market panicked over the US losing its AAA credit rating. Despite (or because of) the recent stock market volatility, we are still very positive the stock market is still in an uptrend.
Here are three reasons for our positive outlook:
- US Economic Growth – While there is some talk about GDP growth being disappointing in the third quarter, at 3.5%, that is higher than all but six quarters over the last 10 years. It was not that long ago that we were told that 3% GDP growth was impossible.
- US Wage Growth – For the first time since 2009, wage growth has exceeded 3%. It is true that wage growth can be a sign of inflation; it also means that the employment market is strong, and families are going to have more money in their pocket.
- US Valuations – After this most recent correction in the stock market, the S&P 500 is trading at a nice valuation level. Depending on which metric and which time frame you choose to look at, the S&P 500 is either slightly above, at, or slightly below historical averages. This tells us that fears of being in another bubble are unfounded currently.
We have used the selloff in October to rebalance and buy more in equities, both US and International. We are not trying to call a bottom but see this correction as an opportunity to buy as opposed to a reason to sell.
We have, also, used the selloff as an opportunity to do some tax loss harvesting. In some accounts, we had taken a fair amount of gains thus far this year. We have sold some holdings that were at a loss and used that cash to buy in areas where we saw opportunity.
We may have put in the bottom for this correction or we may have further still to decline. Either way, we think the strong economic backdrop will continue to provide a positive path for the stock market. The market is taking some time to adjust to higher (though still very low historically) interest rates but interest rates have been much higher in the past and we have seen strong stock markets to go along with those higher rates.
While the future is unknowable, we believe that the most probable path forward is a higher stock market over the next year. So, stick with your plan. Be disciplined. And resist the urge to “do something” just because the financial media is selling fear.