A Garden Variety Correction

The markets had a miserable October.  The S&P 500 index went down 16 out of 22 trading days.   Terms such as ‘pullback’, ‘correction’, and ‘bear market’ were used throughout the month.  A pullback is defined as the decline in a security’s price from a recent peak.   A correction is a pullback of 10% or more.  A bear market is a decline of 20% or more.   In the month of October, the S&P 500 index had a “pull back” and briefly touched “correction” status based on intraday lows of October 29.   This is the second correction this year – the first was in February. Anybody remember that?

Are we headed to bear market territory? No one knows for sure, but we don’t think so.  In our opinion, October was a garden variety pullback – not a large scale, long term correction or prelude to the bear.  Markets do this.  Pullbacks are normal and healthy – the broad market averages three to four 5-10% pullbacks per year, and a 10-20% correction everyone to two years. 

Sure, there are a list of worries – slowing growth rates in the US and abroad, rising interest rates, a trade war with China, election uncertainty, and so forth.  But there are ALWAYS a list of worries and uncertainties. Here is our take:

The US economy is solid.  Third quarter GDP came in at 3.3%; inflation moderated; unemployment is at 3.7%; consumers and businesses are confident and spending.

Corporations are highly profitable with average earnings this quarter projected to rise 21%; most are exceeding expectations. 

The current Fed funds rate is 2.25%, well below the historic average, and less than half the 2007 rate of 5.25.

With rising earnings and declining prices, stock valuations have become more attractive.  

Recessions (two consecutive quarters of negative GDP growth) usually cause bear markets.  Our economy is growing steadily – most agree that a recession is not imminent.  

The trade war with China is certainly worth watching. A deal benefits both parties, and the deals with Mexico and Canada are encouraging.

We think this volatility will subside by mid-November.  Election certainty, oversold markets and reasonable valuations could end the downside drama.  Corporations are “windowed” out of buying their stock before and after earnings announcements. At these prices, corporations will resume their buyback programs with vigor.   This is our opinion – but no matter how this progresses, long term investors stay the course!

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