On Tuesday Feb 6th, 2018 I sent an email message to the members of the W. Swartz & Co. Private Client Group regarding the current market volatility. Below is that message.

Hi Friends,

As you likely heard via the news media or talk around the water cooler we have seen world stocks as judged by the Vanguard Total World Stock ETF (Ticker: VT) drop -6.6% since Friday 1/26/2018 to yesterday 1/5/2018. Today we saw it bounce back that puts us at -5.24% since the decline began.

A short, sudden, “out of nowhere” drop in the market is what we call a correction. Formally, a correction needs to hit -10%, but I define it behaviorally based on the previous mentioned criteria. Perhaps we still will hit that -10% level, or perhaps we’ve already bottomed out.  Trying to forecast a correction  (on the frontend) is a fool’s errand, and picking it’s bottom is about just as foolish.

However, recognizing a correction when it happens and not panicking, can allow for tactical maneuvers that help performance. Most importantly it helps stop the investor from making the classic panic mistake of selling low and buying high. I successfully called the last three corrections, US Presidential Election, Brexit, and China “Slowdown” Worries. See these past Insights Posts: Overreactions & Opportunities  Potter’s Buying, Still Smells Like a Correction, Market Conditions Update – 7/20/16

In times like this there is one question that needs to be asked. What today is different about our global markets view than a couple weeks ago when markets were climbing? If the same general story applies and it does in this case then we are usually looking at classic market correction territory and not bear market territory.

In this case, our worldview hasn’t changed. Probabilities for global recession remain low, growth seems to be picking up in pace among international economies and remains strong at home. Weirdly there are pundits on TV (most cases not professional investors, simply TV personalities) which are attributing the downturn to good news in the latest job report and in wage growth. Yes that’s right, pundits are attributing the downturn to good news.

In US Stocks the recent pullback has brought valuations down to around 17.7 times forward earnings (F P/E), this is a little higher than long-term averages, but well below 27.2 times forward earnings valuations we saw the last time there was a full market cycle in 2000. International developed and emerging markets are still below their long-term forward price to earnings multiples.

Mr. Market is tricky, and I/we can always be wrong. That’s why asset allocation, and diversification is so important especially when there are upcoming cash flows to consider.

Could this be the start of a bear market? Yes it could. Do I think this is the start of a bear market? No, it looks like a classic correction to me. Corrections are normal, volatility is normal. The occasional correction could actually help to extend the life of the bull market.

As always, feel free to reach out with any questions or concerns.

All the Best,

Wyatt Swartz

Message sent to members of W. Swartz & Co. Private Client Group on Tuesday Feb 6, 2018.

For some context, markets as judged by the Vanguard Total World Stock ETF (Ticker: VT) did hit full correction territory of -10.53% on Feb 9, 2018. As of this writing (2/15/18) it has rallied +5.26%.

– Wyatt Swartz

– 2/15/2018