Hi all,

For a couple of weeks, I have been speaking to folks encouraging them to remain calm and be patient with the markets. Markets have experienced a very sharp and sudden pullback and when investors see their net worth hit with a baseball bat “on paper” it is understandably jarring.

The thing is, that investors that haven’t sold any securities during the pullback, still have the same ownership as a month ago. They felt comfortable with those assets a month back, but now seeing the value of those assets drop 10% in a month it is understandable they might be getting a bit nervous.

When markets drop sharp and fast seemingly without any new information or change of the world outlook they tend to bounce back almost as fast. These types of movements in the markets are called corrections. Corrections are normal, they typically happen once every 12 months within the course of a gradual bull market climb.

This looks like a classic market correction to me, and a great opportunity to put cash to work. Of course, I could always be wrong.

Some things we know:

1. US Growth is Slowing – Everyone knows this and has been talking about it ever since the tax cuts were put into action. The tax cuts gave a one-time big bump to economic growth and especially to US corporate earnings. Nobody thought those numbers weren’t going to level off a bit from there even if they do create an environment for better long-term growth.

2. The Fed is Raising Rates – Again, no new news there. The Fed has been raising interest rates basically every other quarter for some time now. This is mostly because economic data in the US and abroad looks pretty good, so the Fed is allowing rates to GRADUALLY go to a market equilibrium level. There is no evidence that equity markets and economies can’t continue to go up during gradually rising rate environments. This is far from hyperinflation.

3. US vs. China Trade Wresltemania – The supposed trade war has been under way all of 2018 but deciphering between rhetoric and the action is tough. One thing that does seem clear is that the impact of actual policy action is gradually baking into the numbers. Global economies are adjusting and revising at a glacier pace, not a tidal wave. The comparisons to Smoot-Hawley Tariffs of the late 1920s are off base because the US is picking fights 1v1 instead of 1vAll, and more importantly the rest of the world isn’t following suit.

4. The Trump Administration is Erratic – Nothing new here, and economies and markets don’t care.

5. US Debt & Deficit is Massive – No new news here. However, I do see this as a major potential risk at some point in time apart from the drag it will inevitably be on future generations. If everyone continues to hold a belief in the stability of the US and the ability and likelihood of the US to service (and maybe even pay off) the national debt then this is a non-issue. If widespread sentiment shifted from confidence to lack of confidence it would be potentially catastrophic. A risk, but certainly not a likely one in the relative near-term.

Capital markets are a function of supply and demand. Over the very short-term no one has any idea where things are going, as sentiment is 100% the driver. However, over the longer-term forward returns will reflect the quantity and healthiness of stock supply in relation to current sentiment (prices). Currently, broad economies and publicly traded corporations remain poised for solid growth. Publicly traded corporations (stocks) remain historically inexpensive relative to the earnings forecasts. Coming into the week the US stocks as judged by the S&P 500 are priced at 15.18x forward earnings, international developed markets are at 12.26x forward earnings.

Wyatt Swartz

November 2nd, 2018