Seasonally, the stock market tends to experience above average volatility during the month of October and this year has proven no different. Currently, there are several drivers of the volatility including concerns about profit margins, fear that the Federal Reserve will raise interest rates too aggressively, anticipation that economic growth rates will slow next year and heightened geopolitical tensions. These factors are further amplified by a blackout period in stock buyback programs. Due to regulatory requirements, corporations are restricted from opportunistically buying their shares as they prepare to report their quarterly results.

While a stretch of market turbulence can induce a sense of worry, these declines are not uncommon. In fact, the S&P 500 has experienced drawdowns of 10% or more in 15 of the last 23 years. However, the market had negative returns in only four of those years. Simply stated, market corrections are a feature of the stock market and by extension we expect the current volatility to persist. 

We have been monitoring developments closely and it’s important to note that at this point, the market has been driven more by fear than facts. Here are some facts that we can use to assess the current environment: 

• Economic indicators continue to suggest that the U.S. economy is strong.
• Earnings growth for 2019 is expected to decelerate from today’s level of 20%+ but remain close to the long-term average of 7-8%.
• Other early warning signs are not signaling an imminent recession. For example, the high yield bond market is not showing signs of stress.
• Equity valuations have become attractive with stocks trading at 15x the consensus forward earnings and, importantly, 18x trailing earnings. Both of those valuation levels are close to the long-term average.

Given these factors, we are not recommending any significant changes in strategy at this time. However, this is a dynamic situation and we will be watching how things progress in the coming weeks and months. In the interim, we will continue to focus on the market’s fundamentals and investment assets with high quality, transparency and liquidity.