After reaching all-time highs in September, stock markets have declined rather quickly in the last few weeks and prompted some questions about what this means for our clients.
We view the recent pullback as a normal stock market correction spurred by the Fed’s interest rate hikes and unwinding of its balance sheet, both of which reflect a strong and growing economy. However, we also recognize that there are a number of other factors and dynamics that negatively influence the markets, and we continue to monitor them very closely. Some of the issues creating the current environment of market uncertainty and declines include the following:
The U.S. is experiencing its second longest expansion in history, going on eight years. Despite evidence that the economy is continuing to grow, there are some questions surrounding how long the expansion can last and what the implications will be for investable assets, such as stocks, should the economy begin to contract. It is our view that the economy can support a continuing expansion, and there is not imminent end to the current cycle.
Strong earnings and the recent tax cuts have contributed to a rise in companies buying back stock as a way to return capital to shareholders. While we expect this trend to continue over the long-term, we must recognize that because earnings season began in early October, many companies are in the midst of blackout periods, during which they are prohibited from buyback programs.
Trade tensions, particularly between the U.S. and China, have escalated without any sign of relief before the U.S. mid-term elections.
The election themselves are causing market uncertainty, especially following the unexpected results of the most recent U.S. presidential election and the Brexit vote from the year prior. However, much of this uncertainty is already priced into markets. Yet, with FiveThirtyEight predicting an 85 percent chance that Democrats will gain control of the House and an 81 percent chance Republicans will maintain control on the Senate1, it is likely that the election will result in a mixed government, which historically yields positive influence on the markets.
Predicting short-term movements in the market is challenging. While is possible that a further pull back could occur, it is important to note that all the economy continues look rather strong, corporate earnings are expected to grow at 19.5 percent2, and we believe the recent pullback is actually a healthy event. We will continue to monitor the markets and their impact on our clients’ financial goals. If you have any questions, please reach out to your financial advisors.
About the Author: Joseph Karl, CFA, is head of research and senior portfolio manager with Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors and Accountants, and a registered representative with Raymond James Financial Services. For more information, call (954) 712-8888 or email firstname.lastname@example.org.
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Joseph Karl, CFA, is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC. Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants. PWA is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors.
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