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October 2018: Monthly Insights & Economic Dashboard

APA Jones 3x4LOHere we go again - the fickle nature of markets is once more shining through. Last month I wrote about U.S. stock markets hitting new all-time highs and although contrary to popular belief, that meant it was time to prepare for a downturn, which we got. It has been quick and steep. And, it may not be over. A real test of the 400-day moving average is certainly possible, similar to the market decline of mid-2015 through early-2016. Why is this a good comparison? They both revolved around the same concerns and same fear.  

The main driver appears to be the fairly rapid rise in interest rates over the preceding weeks. This should not be news, as the vast majority of investors expect interest rates to rise over the next year. However, this time investors chose to react. And once the reaction starts, it can continue for a little while.  

The decline also has roots in the slowdown appearing in China’s economic data. Pundits point to the U.S.-China trade war having detrimental impacts on the Chinese economy. While true, signs of a Chinese slowdown were appearing before the escalating trade rhetoric. In reality,trade tariffs are hitting China at the same time as a natural slowdown in economic growth, making the slowdown more pronounced.

Both concerns are valid, but unless it impacts U.S. economic data, buyers will likely come back into the market. It would be rare to see a confidence-based decline like this turn into more than a 15-20% downturn. Confidence-based declines, as opposed to fundamentals-based declines (i.e. recession), happen on average once per year and usually don’t last too long. While not fun, we’ve seen this before, and it is a natural part of investing. Long-term gains only come through occasional short-term pain. 

However, confidence-based declines can turn into fundamentals-based declines. That is why it is so important to continuously examine the data for signs of that transition. The odds of that transition happening are increasing as we move further along in this economic expansion. As I wrote in previous commentaries, economic data may show peak growth in 2018. That doesn’t mean a recession is right around the corner, but slower growth has impacts as well.

Many of you took notice of my warning last month. Some even went through and reviewed the Pre-Recession Checklist I shared. This has made for some wonderful conversations. While most of the time there are no significant changes we need to make, it is very helpful to know your investment plan is still intact. It means you are as prepared as can be to get through a potential downturn. I encourage you to continue having these conversations. When our important Economic Dashboard statistics start to turn negative we will elevate the priority of these conversations and begin taking more protective measures. For now though, all six of our Economic Dashboard statistics are green and a recession still does not appear imminent.

If you would like to see more data and charts about the economy and various financial markets, please see our Monthly Insights book.

Benjamin W. Jones, CFP®, AIF®
Chief Investment Officer, Principal

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