Markets got a healthy reprieve from last year’s fourth quarter carnage as a few headwinds became tailwinds; including a more dovish Fed, some hopes on trade, strong fourth quarter earnings growth, and an end to the government shutdown.
It’s difficult to get good footing in a market that has so many mixed messages bombarding it. We recommend patience, discipline and diversification as expect continued bouts of volatility. The U.S. government shutdown is over, for now…and the Fed is in pause mode, for now…but confidence in government is low and monetary policy is likely to persist. In the near term we believe the most important needle-mover will be the result of trade negotiations between the United States and China. The problem is the inability to gauge the likely outcome.
It can be difficult to remain calm in the midst of stock market action like we’ve seen over the past couple of months—but discipline is necessary during more tumultuous times. Although we do see rising risk of a recession, we don’t see a repeat of 2008 in the cards. Absent a recession—even if we enter a “formal” bear market (at its recent closing low, the S&P was down 19.8%)—additional weakness may be somewhat limited. Recession-related bears tend to be longer and grizzlier than non-recession bears. Until we get more clarity on the health of the economy, we continue to suggest investors remain defensive.
October has again been a scary month for investors, even though past performance does not indicate future results, history shows that stocks tend to face a seasonal tailwind heading into the end of the year. There will likely be more volatility but at least overly optimistic investor sentiment has eased, U.S. economic growth remains solid, and the midterm elections will soon be over, all of which could trigger at least a relief rally off the recent lows. But gains both here and globally are likely limited by myriad late-cycle pressures. Remain disciplined, consider diversification and rebalancing, and consider establishing a more tactically defensive positioning.