Perspective on Markets

The stock market’s dramatic 8% drop in the last six trading days is breathtaking and disconcerting, especially yesterday’s 4.1% decline. Our view is that this is an overdue valuation correction, which we do not expect to escalate into an all-out meltdown or crash. While we cannot know how much further the market will fall or the duration of the correction, we would be surprised if it surpasses the most recent short-term correction of December 2015 – January 2016. At that time, the market fell 13 to 14% from its peak to its low point, before recovering and ending up to post solid gains for the full year.

Previous recent major market crashes occurring in 2000-2002 and 2008-2009 were characterized by sub-par economic trends, and easy credit leading to overheated speculation in high risk bond and equity markets. The resulting credit crunches presaged severe recessions, accompanied by 50-60% equity drops. While one could argue that heightened speculative activity is present today (see FANG stocks and High-Yield Debt), we see a stronger underlying economy promoting increased jobs creation driven by stimulative tax reform. Thus, we do not believe that a credit crunch induced recessionary outlook is in the cards.

Many who fear that a recession could again soon develop base it on a combination of expected further Fed rate increases, spurred Friday by the strongest labor wage gain report this cycle and the recent sharp increases in short to intermediate term treasury interest rates. They worry interest rates will go much higher, choking off the economy. We think it far more important to recognize that the economy itself may be pulling out of its long-term secular stagnation. That will carry somewhat higher interest rates with it, establishing a more normal, healthy interest rate equilibrium – which we view as a good thing, not a precursor of recession.

Lastly, it is important to note that the average intra-year stock market decline over the past 37 years, is about 14%. In 2017, the largest decline was less than 3%. Corrections are inevitable and healthy for a bull market to sustain itself.

Our conclusion is that this is a correction and probably well overdue, but not the beginning of an equity market debacle. As valuation driven investors, it is our intention to take advantage of the better value prices created in this correction to create improved portfolio structures for the longer term.

Mark E. Eveans, CFA
President, Chief Investment Officer