Financial news about a global market plunge like we experienced last week can be unsettling. Last week we asked Richard Johnson, Principal/Financial Advisor with Bernstein Private Wealth Management, for his perspective on what’s happening in the markets right now. Richard partners with the SWC Endowment Fund Management Committee as we strive to be excellent stewards of our conference resources. Here is what Richard had to say.
Over the past week, global stocks have fallen roughly 5%. We attribute the downward move to three main culprits—the recent rapid rise in interest rates, profit-taking in the market’s growth stock leaders, and warnings from companies that their earnings would be negatively impacted by trade-related factors. While stock sell-offs of any magnitude can be disconcerting, we should also recognize that they are normal.
What Caused the Stock Sell-Off?
Below we discuss the catalysts that caused the market downturn and our perspective for what may come:
o Interest Rates: The 10-Year Treasury yield moved from 2.8% in mid-August to 3.2% on October 10. A 40bp move in six weeks is not uncommon, but with investors focused so closely on the level of interest rates, the magnitude of this move became worrisome.
o Market Leadership Sell-Off: Over the last few years, technology stocks—the high growth FANG stocks, in particular—have led the market higher. Since late last week, this sub-group of stocks has reversed course, leading the market lower as investors took profits from these recent winners. Generally, when market leaders are sold indiscriminately, all sectors suffer, too.
o Trade-Related Earnings Warnings: Select companies, from luxury goods makers to industrial supply distributors, recently noted concerns about the negative impact of trade issues on their recent or future earnings. Investors saw this as a sign that more earnings warnings may be on the horizon.
What to Expect in the Near Term
The markets have been very calm for several years, so this week’s downturn feels extreme. But to put it into perspective, a 5% selloff in a week is not extraordinary. Volatility, as measured by the VIX Index, is only slightly above average levels, although it has moved higher from a prolonged low base.
Fundamentally, while we need to acknowledge the headwinds from trade issues, a strong US dollar and higher interest rates, global economic growth is still solid. In particular, the foundation of the US economy remains sound as evidenced by record low unemployment rates and growth that has accelerated in recent quarters. We see no sign of a recession on the horizon that could cause a prolonged equity market downturn. But markets and economies, while linked over the long term, can become detached for short periods of time. So, we would expect that equity market volatility will continue for some time.
What to Do?
Times like these are not uncommon; we expect them to occur and incorporate periods like these into our forecasting tool kit. Your asset allocation is built for the long term, but it also embeds the fact that disruptions like this will happen from time to time. So, the prudent strategy is to focus on the long term and know that your allocation is appropriate.
Some of the conference’s designated funds are held with United Church Funds (UCF). You can read UCF’s perspective on the economy and markets here.
In Proverbs 3:9-10 we read, “Honor God with your wealth and with the best part of everything you produce. Then God will fill your barns with grain, and your vats will overflow with good wine.” In times of financial uncertainty both our faith and our faithfulness steadies us and calms our fears. Thank you for investing in the ministries of the Southwest Conference!
Bill