It is oft said that October is one of the scariest months for stocks, and this one certainly scared the bejesus out of investors the world around. November – the beginning of the typical seasonality bull run – initially offered some respite as shares bounced, but ultimately the gloom returned, and markets plunged anew in November.
As mentioned before, we attribute the Autumnal Plunge to three primary factors, in deceasing order of importance:
- Trade jitters morphing into outright fright. While the Trump administration seems generally on track in resetting the world trade order, China has proven intractable. Loggerheads with the world’s second largest economy – and arguably the world’s most important low-cost manufacturing center – has given the market fits because of the potential to disrupt US companies supply chains and chill global trade for many if not most countries. This is the big cloud over the market, and when it clears – as Camarda expects it to eventually do – the market should respond with a very nice spurt.
- Valuations of US stocks have been frothy for a long time now, and we have been overdue for some air letting out of the bubble. Trade jitters – more than interest rate hikes – supplied the trigger for what we believe is a healthy correction in a still health bull market. While a bear market is inevitable at some time in the next few years, we don’t think it is here yet.
- The inevitability of interest rate increases has finally become apparent to the greater investing community. This is somewhat perplexing, since the need to normalize rates has been obvious to many of us for many years, but in any case higher future borrowing costs are only now being baked into stock pricing. Higher rates will chill consumer spending on financed items like homes and autos, and make it more expensive for companies to borrow and expand. Still, rates are and will for a long time still be low by historical standards, and we think the market will eventually come to realize this and not be overly impacted by interest rates.
While we remain concerned about these three factors, we take seasonal cheer from the fact that we have entered the most historically profitable time of year for stock investors, who have generally done well from November to April much of the time. After the drubbing markets have suffered since the September highs, there is every reason to expect a typical Santa Clause rally, and Camarda expects a fairly robust pop and nice numbers for your January statements. Longer term, we are optimistic about the outlook for non-US stocks, as well as carefully selected and shopped (as in shopped hard and bought on sale) US stocks.
We note that value stocks – the kind Camarda favors, solid companies at cheap prices without much air to be let out of their balloons in market corrections – seem to have enjoyed a renaissance of late, holding up relatively well as the market falls. We also note that the hardened trade positions of the Chinese and Trump administrations pose a real risk of kindling a US recession in time to upend Trump’s reelection chances – a risk we can’t believe has escaped the notice of Mr. Trump’s advisors. If for this reason alone, we expect a deal with China soon, which will take a lot of pressure off the markets. Mr. Clinton’s “it’s the economy, stupid” triumph over George H.W. Bush will not be ignored without peril.