The month of May was not good for stocks with both the S&P500 and DJIA losing over 6.5%. The Nasdaq was down nearly 8%. This has caused some to worry as to whether or not we are in for another stronger move down like we witnessed in December last year. We believe this is still volatility within a bull market and patience will be rewarded intermediate and longer term. We have simply given up some of the gains going back to early March.
There are a couple of notable differences between now and what happened in December. First, in the fourth quarter, the Fed raised interest rates and was indicating that they would raise rates two or three more times in 2019. Now the Fed has reversed course and taken a dovish position. The Federal Funds rate is now expected to be steady and, in fact, the market is pricing in the next move may be lower interest rates. Second, late last year a trade deal with China was expected in the near term. Now trade and tariff rhetoric is again creating market uncertainty.
During times of volatility, we look for signs of fear that typically lead to a market turnaround. This “flight to quality” is very apparent in the 10 year Treasury Bond with the rates falling precipitously to around 2.09% today. Gold is also being bid up and has made a large move over the last few days. The volatility index is also a widely followed “fear index” and has traded at a price indicative of a higher level of fear. Usually when these indicators show some capitulation or the “throwing in of the towel”, the market is oversold and not far from turning up again.
When we hit a new high for the S&P500 on May 1st, we did not get acceleration through the September high from last year. This created a “double top” which becomes a point of resistance, and therefore, it is not completely surprising that we saw some backing and filling or profit taking. Fundamentally however, the economy is still reasonably strong and corporate earnings have come in better than expected. First quarter GDP (the measure of economic output) was up over 3% and well over 70% of companies have bettered earnings estimates.
The market may still have a little more downside, but we view the recent action as longer term opportunity rather than a reason for deeper concern. The market is still trading at about historical valuation and there is not the excess in valuation that could lead to a more sustained downturn.
We expect the current uncertainties to fade over time and expect an oversold bounce soon. Though we cannot call a specific short term bottom, we encourage our clients to avoid emotional decisions and we remain optimistic intermediate to longer term. We fully recovered from the 4th quarter 2018 weakness and expect the same this time with patience.
As always, we thank you for you trust and confidence.