Weekend Reading: Rough Week

Rough week!  The Dow was down more than 800 points on Wednesday, and the S&P 500 was down almost 100 points. The Nasdaq composite index was down more than 9% from its recent high and the S&P 500 down more than 5% from its recent high.  Wednesday in particular was quite a scare- 800 points on the Dow - WOW! But let’s put this drop in perspective, because points matter less than percentages.  If you think about it, in 1980, the Dow started the year at 838.  Thus, an equivalent drop (3%) during that era would have been 25 points.  To fear a drop of 25 points seems almost laughable these days.

The truth is, we usually see a drop of 3% in major US equity indexes every 3-6 months.  What’s alarming is how the news media frames the story in a manner designed to increase fear.  Fear increases viewership, which drives advertising, which results in increased revenue for them. Try this: Google “largest drops in Dow Jones history”.  Notice that every link you find discusses point drops, even though any educated finance journalist knows that percentages matter far more.  But hey, whatever scares people into reading their articles, right? (Ok, my cynical rant is over, lets get back on topic.)

As I was saying, the Nasdaq composite index was down more than 9% from its high and the S&P 500 was down more than 5% from its high.  But neither of these drops qualifies as an official correction of 10% - at least not yet. What we do see is that volatility appears to be increasing. In fact, we’ve had 7 instances of 2%+ down days on the Dow in 2018.

In past articles, starting in early 2017, we had forecast the last market high prior to a recession to occur sometime between late 2018 and the end of 2019, which indicates that a recession could be in place by mid-2020. We also predicted steadily increasing volatility and more substantial “bad days” during 2018 and 2019 – the years leading up to said recession. Well, we’ve certainly seen volatility pick up, but the economy remains strong. Job creation is high, unemployment is very low, consumer confidence is high, etc., etc. 

Although the pace of the growth of our economy is slowing, the economy itself is not slowing yet.  Although we here at MORWM fear that some of the finance-related legislation that has been passed under Trump’s administration may have unappealing long-term consequences, the short-term benefits may continue to provide fuel to a slowing engine.

The big question that we’ve been asked several times over the last few days is: Is this the start of the decline what we’ve been talking about?  The answer is: probably not. That’s a carefully worded answer: probably not. However, as of 12 days ago, we are officially inside the window of worry that we’ve been writing about for more than a year.  And recessions often start with a few really bad days, which seem to never end until the market is down 20-40%. Only then, in hindsight, do we look back and recognize the beginning of the crash. But today, the underlying economy maintains more strength than is traditionally present at the start of a long, drawn out, deep market decline concluding with an all-out recession.

Because of our forecasts, we had already started to reduce risk again about three weeks ago; we wrote about it in our weekend reading on September 23rd. We did not finish, and we’ve paused because the S&P 500 index has fallen back below the trigger point we had been using to determine when to unwind the “dip” trade. (also discussed in the aforementioned article)

We may not see the next recession until 2020 and we may continue to achieve more market highs through the end of next year. This is why we do not run scared, we do not make irrational decisions, and we do not try to time the market with surgical precision.

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch

Depending on the results of the midterm elections, consumer confidence may be bolstered even more, and we may see further markets gains even beyond my own expectations.  But prudence is the cornerstone of disciplined investing, and for that reason, we will be treading carefully and conservatively for the time being.        

Have a lovely weekend. We have something exciting to share with everyone next week!  Stay tuned.

--Matthew


Matthew Ramer, AIF®
Principal, Financial Advisor
MOR Wealth Management, LLC

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