Investopedia describes a recession as a “significant decline in economic activity that goes on for more than a few months”^1. This does not describe the current environment. While stocks have reached an epochal point of volatility not seen since 2008, the US economy continues to show strength. Setting aside for a moment the developing trade and political crisis that we’re facing, global unemployment reached significant new lows and consumer confidence continues to increase, pushing the Federal Reserve to maintain a momentum of increasing rates.
Bad news has its way on stocks that can cause significant damage in the short-term. Fundamentals such as increasing corporate profits, productivity, and other factors will have its say on stocks over the long run and should remain the focus of a sound investment strategy. Nevertheless, we should be cautious as the developing trade war with China, the second largest economy in the world, could turn headline news into lasting economics. The arrest of Huawei’s CFO, Meng Wanzhou, brings a new development to our trade war that signifies how far the U.S. is willing to go to compete. The Chinese reaction could be fierce, threatening executives there with the same voracious approach; it could have a significant impact on equity markets over the next few weeks.
Technically speaking, the S&P remains in an intermediate-term bullish trajectory despite the volatility in the last month. We are now at the floor of major support, 2,633 on the S&P 500 index. A break below this on high volume would spell worse for the index. A likely a reaction would be that stocks go higher from here. Another indication of potential bullishness is the formation of a technical channel, angled up, as illustrated in the image below. A channel is a relationship between buyers and sellers as the price bounces between the two forces, ultimately scaling higher, if ever so slowly.
Across the pond, equities in Europe and Asia have fared worse and seem technically bearish. Fundamental analysts might argue that they are undervalued and are now considering this asset class worth investing in. Steve Johnson of the Financial Times said, “Measured by price-to-book ratio, emerging market equities currently trade at a 36 per cent discount to their developed world counterparts, one the widest gulfs seen in the past 10 years.”^2
Investors employing asset allocation as an investing strategy may be witnessing an improvement in bond values recently. Traditionally, bonds go up when stocks go down. This hasn’t been the case lately as a flattening yield curve doesn’t reward investors for buying bonds over cash. Yet, the iShares 20+ year Treasury Bond ETF (TLT) jumped 3% higher last week, giving some conservative investors a small sigh of relief.
Although we’re not in a recession, taking a prudent approach to investing is suggested. Your asset allocation should include longer duration bonds to help offset risk with equities. Of course, the primary approach should be to know your risk tolerance and time horizon for the money that’s invested.
At Eureka Wealth Management, I help my clients understand the risk that they’re taking with their investments as well as find potential opportunities. Financial planning helps determine the time money can be invested and at what level of risk. Call for a free, initial consultation at (760) 537-0791 or online at eurekawealthmanagement.com.
^2: “Emerging market equities trade at close to a decade-long discount,” Oct. 22, 2018