The most recent market fright has been fear of inflation leading to a Federal Reserve that is even less accommodative than previously anticipated.
Reality is that there are often multiple elements that are at work. Oftentimes a little perspective is needed, so let’s look at the facts.
I started by looking at seasons. In my last commentary, I discussed the fact the 4th quarter can be one of the best seasons to be invested in. The fact is, fall market corrections are normal. With the exception of 2017, we have had at least one minor fall market correction annually during this past expansion. Additionally, interesting is the fact that those corrections are followed each time with a near-term recovery and new highs.
In order to see more clearly, I look at the 1-week advance/decline line of the S&P 500. With moving averages applied, it is notable that late summer often marks a high point in the trend, followed by a turn for the worse. When more stocks in the S&P 500 are declining than increasing in price, we get market corrections. That is especially true when we examine weekly charts.
2017 is notable because there was no fall correction. The fact is, the 2018 correction that began at the end of January may very well just be a correction that was in fact overdue.
By examining advancing verses declining stocks, we gain perspective on what we are enduring now. The potential silver-lining is that once we put in a bottom on this correction, we are likely to see a renewed move upwards near-term. Based on this type of technical data, it would be expected that we would have recovery into the year end.
Although I like the ring of the word recover, there should be some caution in waving the victory flag too soon. There is still pressure that is on due to the current trade war with China. In November, we will find out if there is any forward path that avoids prolonged and deepening trade wars. If everything goes south, we could prolong this correction. However, the economic data for the US has been very strong and there are no current signs of recession. That is great news since corrections are most often transient and recessions are what we all want to avoid.
We remain fixed on the data and making sure that we analyze things from a top down approach in order to minimize the effects of market changes on investment portfolios. In the meantime, don’t let yourself get too frightened by the things going bump in the night!
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