Markets have now given back all of their gains for the year with the S&P 500 down a bit less than 1% year to date, the Dow Jones Industrials average down 0.3%, the Russell 2000 down 7%, and as of this writing the Nasdaq falling into negative territory as well. The declines may seem modest, but It was just over two months ago that the S&P 500 hit all all-time high with economic growth having accelerated over the summer. Reflecting a more defensive posture taken by investors in recent weeks, Utilities and Healthcare are the two top-performing sectors through the middle of December up 10.8% and 9.1%, respectively. Not surprisingly, more cyclical sectors such as Materials and Financials are bringing up the rear.
Last month we discussed the myriad factors that led to the sudden change in stock market performance. Issues such as uncertainty over the path of Federal Reserve policy, the ultimate outcome of trade negotiations with China, news flow regarding the Mueller investigation, and Brexit continue to weigh heavily on investor sentiment. In fact, sentiment has recently nosedived, as evidenced by significant weekly outflows in equity mutual funds and the highest bear-reading among individual investors since April 2013 based on the most recent AAII sentiment survey. We respect the price action in the market and have been surprised at the depth of the current slide in stocks given still-strong macroeconomic statistics and the fact that stocks tend to do better this time of the year.
That said, the economy is slowing somewhat with areas such as housing and autos slumping now for several months, which underscores a key question that stocks are grappling with: What is the earnings outlook for 2019 if interest rates continue to rise, and the weakness in housing and autos begins to pervade other areas of the economy. Current consensus estimates are calling for about an 8% increase in S&P 500 earnings next year following a 22% or so increase this year. We knew that the rate of growth in earnings would slow in 2019 as the benefit from the corporate tax cut was lapped, but there had been little reason to fear a more severe slowdown—or even decline—in earnings, until now.
The resulting uncertainty is roiling the market, and it is times like these when investors can assess their portfolios to determine whether positioning is consistent with their goals. After a long bull run, it is easy to get complacent and perhaps let equities consume a larger part of a portfolio than when it was constructed. Stock market corrections are a good time to, well, take stock. If you still have a long-term time horizon, are working, and saving to send children to school and for your retirement, buying equities and “averaging down” during corrections is likely appropriate. You are taking advantage of these swoons and have time to let your investments recover and compound.
If, however, your time horizon has shortened and perhaps some of your original goals have been fulfilled or changed, it may be time to consider altering investment allocations. The simple fact of the matter may be that you have less time to recoup losses if a longer downturn (i.e., bear market) were to unfold, and capital preservation should take a more prominent spot among your investment priorities.
As always, please feel free contact your Thompson Davis investment advisor to discuss your investment goals and objectives and whether changes should be made in light of the prevailing investment landscape. We stand ready to evaluate your current situation and can bring a variety of tools to bear to help in this process.
—Jack Kasprzak, CIO