By Christopher B. Moore, CFP®
Equity markets around the world have declined by roughly 10% from their recent peak. We are not of the view that this decline is indicative of a broader selloff in equity markets and instead see this as an opportunity to add to equities at attractive levels. The decline has largely been led by large technology stocks (Amazon, Netflix, Alphabet) after they had experienced a multi-year bull market, but no sectors outside of Utilities and Consumer Staples were spared. The S&P 500 index grew earnings by roughly 22% in the third quarter but guidance for future quarters was muted due to uncertainty around US/China trade negotiations. The reduced visibility into forward growth, combined with rates moving higher in the US, spooked markets. We believe that the decline over the last few weeks is temporary and largely driven by technical factors. Our view is that the US stock market is adjusting to quantitative easing coming to an end in the US and Europe, rates moving higher in the US, and uncertainty around both trade and the upcoming midterm election cycle. We suspect that we will see a continued rotation within equities where the styles, sectors, and market capitalizations that may have been the leaders recently will be the laggards going forward. We are not concerned about a recession anytime soon. The economic fundamentals are sound and supportive of future equity market gains:
- U.S. GDP growth exceeded 3.5% in Q3
- U.S Unemployment is currently 4%
- The Fed, while tightening, remains accommodative with the Fed funds rate at 2.25%
- U.S. inflation remains under control at 2.3%
With the decline of the last two weeks, the S&P Price/Earnings (P/E) ratio dropped to 15.3 versus 18.8 earlier this year. Non-US equity markets are even cheaper after Asian, European, and Emerging markets have continued to decline off of their January high’s.
S&P 500 earnings for next year are expected to grow at a healthy low double-digit rate. Wage growth is under control and the current administration remains supportive of corporate America. In summary, now is not the time to panic. The recent correction is healthy for equity bull markets. Now is the time to be adding equity exposure to portfolios.
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