On Monday JP Morgan, one of the Portolio Strategists we utilize for client accounts, wrote this about last week’s sharp market decline…
October has seen the return of market volatility, with the S&P 500 Index falling for six consecutive sessions through last Thursday, its longest losing streak in nearly two years. A combination of factors has led to this sell-off including fears of an overheating U.S. economy, Chinese economic deceleration, negative effects of tariffs on corporate earnings, perception of aggressive Federal Reserve rate hikes, and
elevated equity valuations.
However, after considering each of these factors in turn, they each appear to be downside risks to an otherwise still positive outlook for the U.S. economy and corporate profits. Inflation still looks contained, the Chinese government has recently implemented a variety of stimulus measures to combat an economic slowdown, new tariffs still look like they can be absorbed by U.S. companies, interest rates are still rising slowly by historical comparison, and U.S. equity valuations are now marginally below average.
As a result, this is likely a normal pocket of volatility, rather than the beginning of a bear market. Daily market moves of 1% up or down are not uncommon, and have occurred an average of 62 times a year since 1980. This year, we have seen 39 such moves; this feels high when compared to 2017, but remains below the historical average. Given a still constructive backdrop, investors should resist the urge to time the market or abandon equities altogether. Rather, given that the U.S. economy is later on in its cycle, this is a good time to ensure that portfolios are well balanced and diversified.