Dr Henry Ma, Chief Investment Officer of Julex Capital Management, one of the Portolio Strategists we utilize for client accounts, recently wrote this about the sharp market declines we have recently experienced…
The recent market selloff concerned many investors. In the last six trading days, the S&P 500 index lost 6.7%, and the small cap and emerging market equities fared worse. I feel it will be prudent to send you a short note to communicate our thoughts so you can understand where we stand.
First, what triggered the current selloff? Several factors were to be blamed here.
Second, what do we do now? The selloff definitely has kept us alert, but we don’t think we need to overreact to the situation. The goal of our strategies is to limit downside risk during a protracted bear market while maximizing upside potential in the bull market through a rule-based quantitative monthly process.
All the indicators (economy, market trend, volatility and liquidity) we use in our model were positive at the end of September when we did our monthly model run. The US economic growth is solid, corporate earnings have been strong. The September ISM Manufacturing Index had a very strong reading of 59.8. The final print of second-quarter GDP growth was +4.2%. The Federal Reserve estimates the GDP growth rate of 3.1% for 2018, 2.5% for 2019, and 2.0% for 2020. The third-quarter earnings season is on the way. Most analysts expect strong earnings reports from corporations.Although President Trump complained about the central bank’s rate hikes, it is highly likely the Fed will continue raising interest rates at a gradual pace – one hike in December and three more in 2019. We don’t think the gradual normalization of interest rates will derail the economic growth and financial markets in the long run.
Despite many near-term uncertainties and headwinds, the long-term trend of solid economic growth and corporate earnings remains intact. Therefore, we don’t believe we are in, or close to, a bear market, but we expect more volatility in the near term. Our current “risk on” positions will remain the same.