After a strong first half, stocks take a breather in the third quarter. Ron Rough, our Director of Portfolio Management, gives an update about the catalysts affecting the market and how we are managing our portfolios in response.
October Stock Market Update Transcript
Hello, this is Ron Rough with a video market update for October. Stocks had a very strong start to the year, as we know. However, in the third quarter we had a decided moderation in performance, and that should be, we should expect that given we had such a strong start to the year. It’s not unusual for stocks after a strong period to take a breather, catch their breath if you will.
Now from a fundamental standpoint, what’s affecting the market right now are the same three things that we’ve been talking about for a while. Number one, the Federal Reserve. Investors have been very uneasy with the path that the Federal Reserve has been with lowering interest rates. They now seem, the Federal Reserve now seems to be on a path to lower interest rates, but investors are nervous about are they going fast enough to keep the economy going. Secondly, of course, is the trade war with China. It continues to go back and forth between good news and bad news, and with every bit of news, good and bad, the market seems to react one way or the other. Then thirdly is what’s happening with global economic growth. In fact, it’s the first two factors that are affecting global economic growth.
In the first quarter of this year, we had GDP growth come in at 3%, a pretty good result. In the second quarter, it backed down to 2%, and forecasts for the third quarter, which haven’t come out yet, economists are forecasting around one and a half percent. If that trend continues into the fourth quarter and next year, investors will get very concerned about the potential for a recession and certainly a slowdown that could affect corporate earnings. So from a fundamental standpoint, that’s what the markets are concerned about and why you’re seeing stock market returns bounce back and forth.
From a technical standpoint, there are two main charts that we’ve been pointing people to for the past few months. The first one is just a chart over the last two years of the S&P 500, and stocks peaked back in January of 2018; we had a decline; markets have been back and forth; and if you look at this overall pattern, you’d say that it’s an uptrend but it’s a very choppy uptrend. The language we often use is that we’re in a landing, and what we’re waiting for is for stocks to break above this landing, in essence break into a new uptrend. What’s interesting, if you look at the Value Line Index, which the S&P looks at 500 stocks and weights them by the size, so big companies like Microsoft and Apple and Amazon carry the bulk of the weight and can drive the returns. The Value Line Index is looking at 1,700 stocks and equal weights, so the smaller companies in the Index have as much impact as the bigger companies. You can see that we are nowhere near taking out the new high which was back in September of 2018, and in fact, this downtrend line shows that if anything stocks are having a hard time even breaking above that downtrend line. So this pattern here has us more cautious.
How does that represent in our portfolios? We do have some cash in the portfolios. Our cash levels are in the 20 to 25 percent range of whatever the maximum level is, so if we look at our portfolios currently, conservative growth is at 55 percent equities, and they can be up to 75 percent. So we have a little bit of cash. You can see it here on this bottom row. There’s a little bit of cash in the portfolios, and that’s just because of this difference between the market leaders with the S&P; and the average stock is represented by the Value Line Index. As we come into the end of the year, seasonally it’s a strong period typically, so there’s reason to be optimistic. Maybe there will be some progress made on the trade war, so that’s reason for optimism. However, we have our safety nets on all of the securities, and we will not hesitate to execute those safety nets if in fact markets struggle into year end, so that’s what we’ll be looking for.
And so if you have any questions about this update, please email us, and until our next update, thank you for watching and happy investing.
Ron joined the FSA team in 2006 and is responsible for the day-to-day management of client portfolios, including portfolio construction, fund selection, and risk management. Along with his daily responsibilities, Ron contributes a monthly market commentary and develops presentations for clients and prospects.