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In a Persistent Pullback, Perspective Is Priceless

By: Craig Fehr, CFA January 03, 2019


Stocks sold off on Thursday (Jan. 3), with the S&P 500 falling 2.5% and the Dow dropping 660 points amid renewed market anxiety over the outlook for the global economy. The TSX was down by 1%, as Thursday's worst-performing sectors – Technology and Health Care – are very small components of the Canadian stock market index. Bonds, in turn, rallied as investors sought lower-risk investments, pushing 10-year rates below 1.9% in Canada and 2.6% in the U.S. - the lowest yields in a year.

Volatility has become more of the norm than the exception lately as a maturing investment landscape has seen risks cloud a view that still contains plenty of sun. As a long-term investor, the key is not to ignore the risks, but to remain focused on your investment horizon.

Worries over global growth

Thursday's decline was sparked by renewed concerns over the outlook for global growth, along with the potential impact global headwinds may have on the domestic economy. Specifically:

  • Apple announcement sparks concerns over earnings and China – Apple announced Wednesday evening (Jan. 2) that significant weakness in emerging markets – notably China – are weighing on performance. The tech giant revised down its revenue outlook, citing slower-than-anticipated iPhone sales and a more challenging macroeconomic environment abroad.
  • U.S. Manufacturing shows signs of wear – A release of the latest ISM Manufacturing Index on Thursday (Jan. 3) showed that manufacturing activity in the U.S. slowed in December. In particular, new orders dropped and export orders remained well off recent highs, stoking fears that global weakness is accelerating.

Our take: Fatigue, not recession

The combination punch of Apple's commentary and slower manufacturing activity unsurprisingly knocked the wind out of the equity market, stunting stocks' 5% rally since Christmas Eve. The steep correction in stocks in recent months has been driven in part by growing fears of a global slowdown, and this news fed this narrative. This is not, however, the entire story.

Slower global growth – We expect slower growth around the world this year, led by the ongoing deceleration in China (the world's second-largest economy). We expect slightly slower U.S. GDP growth as well, as the boost from the tax cut fades. Commentary from Apple and weaker manufacturing provide some confirmation that trade tensions are having some negative impact, but in our view, this does not punch a one-way ticket to recession, as the recent equity market selloff might otherwise suggest.

Manufacturing and GDP – Extended bear markets typically need recessions for fuel. Manufacturing activity has waned, but it is coming off its highest levels in years and remains firmly above the level that coincides with economic contraction. Further, the larger driver of U.S. GDP – the consumer – remains in good shape. ADP employment data released on Thursday (Jan. 3) showed a much stronger-than-expected gain in December payrolls, consistent with the labor market strength that should continue to support consumer spending (more than two-thirds of U.S. GDP). It should not be overlooked that unemployment is at a 49-year low and wages are rising at their best clip in years. The U.S. economy is exhibiting some fatigue as we advance in this latter stage of the cycle, but it is not teetering on the edge of a recession.

Look beyond the headlines – We expect volatility to continue as expectations for global growth and corporate profits are recalibrated alongside ongoing anxiety over tariffs and Fed policy. That said, a wider view of the fundamental investment backdrop is still far more favorable than short-term moves and headlines might suggest. For perspective, the stock market experienced steep declines in 1998, 1987 and 1966 (falling an average of 25%), but these did not mark the end of the broader positive cycle for stocks, and recessions did not follow.1 In fact, stocks rose by an average of 21% in 1999, 1988 and 19672. We expect the market's path to be rockier in the coming year, but the fundamental data don't suggest the recent pullback is the opening act to a prolonged, severe bear market decline.

The value of a disciplined approach

Your strategy is built around your long-term goals and your comfort with risk, which means you don't have to panic even when it seems like the market is.

Diversification and a long-term perspective won’t exempt your portfolio from short-term market declines, but we believe they do put you in a better position to:

  1. Weather the downturns
  2. Make smart decisions that align with your goals, not emotions

Volatility like we've experienced recently may feel unsettling, and market corrections such as this one can be unnerving, with stocks down 15% from their September highs. But remember, diversified portfolios have held up better, and a wider perspective shows that, despite the recent drop, equities have still gained 15% over the past two years and 50% over the past five.2

Over the last 10 years, the average return over the year following a 10% market correction was 29%2, highlighting the opportunities that pullbacks can create for long-term investors. Staying on track over time includes portfolio reviews and disciplined adjustments aligned with your goals. Stay calm, stay invested, and look for opportunities to take advantage of market swings.

For more information or to open an account, set up a face-to-face meeting with an Edward Jones advisor in your community.

Important Information:

1. Source: Bloomberg

2. Performance of the S&P 500 index, measured in total return.

Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal.

Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

Past performance does not guarantee future results. Diversification does not guarantee a profit or protect against loss.

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