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November 10 2018 Market Update

By on Nov 20 in Economics, Finance, Financial advisors, Market Update, Worth sharing

Equities Falter in October – What’s Next?

Months like October are the reason you so often hear us talking about the merits of diversification.

After an expansive period of growth, equity markets sharply reversed course last month. The S&P 500 gave up $1.91 trillion in value for October 2018,[1] falling 6.9% for the worst month since September 2011.[2] Developed and emerging markets also fell on trade concerns, a strong dollar, and slowing economic growth forecasts.[3]

Of course, for many Americans this was simply a backdrop to the highly anticipated and hotly contested midterm elections on November 6th. In other words, it’s been a newsworthy 40 days. What does it mean for you?

Choppy Markets Worldwide

International equities also had a tough month this October.

The Shanghai Composite fell 7.7% for the month on continued trade tensions, putting losses as over 30% for the year.[4] Emerging and European markets also fell in October, with the MSCI Europe Index falling 5.31%[5] and the MSCI Emerging Markets Index tumbling 8.71%.[6]

Whether October reflects a short-term correction or part of a longer-term shift remains to be seen: as of now, forecasts are mixed. However, between interest rate increases by the Federal Reserve, a hardening of trade restrictions, and a strong dollar, there are some indications that economic growth will be more modest going forward.

The International Monetary Fund revised its global growth estimates down slightly on these factors,[7] while corporate earnings – though still robust by any measure – have slowed compared to their phenomenal performance earlier in the year.[8]

It would not surprise us to see some moderation in economic and earnings growth rates going forward: it’s difficult for us to imagine that the level of momentum we saw in 2017 and 2018 could be maintained indefinitely.

Rising Interest Rates: A Sea Change for Bonds?

One trend that appears to be moving relatively predictably is the rise in interest rates. The Federal Reserve has pursued a strategy of steadily raising rates in the face of strong economic and jobs reports, and the expectation is that this will continue, with Federal Reserve Chairman Jerome Powell calling for rates to “very gradually” move back to “normal.”[9]

As of the third quarter, unemployment is at 3.7%[10] and indications are that overall employment and wages are rising. The unemployment is currently at its lowest level since 1969; and it has been suggested that labor shortages could possibly hinder future economic growth.[11]

For investors, rising interest rates implies higher yields on bonds – as market interest rates rise, bond yields do, too. This isn’t strictly “good” or “bad” news: it depends on your perspective. Higher interest rates mean that debt becomes more expensive for consumers, businesses, and the government. But it can also attract yield-seeking investors away from riskier assets, meaning higher demand for bonds as an investment, and higher returns for bondholders.

We’ll talk about this trend with you personally in the context of your portfolio, including how rising rates could potentially influence your personal investment outcomes and risk profile.

Midterm Elections

Finally, we had the long-awaited midterm elections on November 6. Democrats claimed control of the House of Representatives, while the Senate remains majority Republican.[12] As of this writing, seven governorships officially passed to Democratic candidates and three states had yet to confirm outcomes.[13] 

What it All Means

With a split legislature, we anticipate see more political gridlock going forward unless the parties begin making moves to reach across the aisle. For most people that sounds like a potential negative, but markets responded positively to the news. European markets, the S&P 500, and the DOW all posted gains on the day after the elections.[14]

What happens next, however, is unclear. As noted, economic and corporate data remain strong, but we might not see the same momentum going forward. Combined with political and economic shifts both at home and abroad, we would not be surprised if volatility became a bigger factor in equity portfolios into 2019.

But, as you’ve heard us say time and again: this is the reason we believe in disciplined diversification. Markets go up and markets go down, and having a thoughtful strategy that works for you over time is, in our opinion, the most prudent way to navigate both times of plenty and times of turmoil.

Please give us a call if you’d like to discuss your allocations, and otherwise keep an eye out for more communications from us as we head into year-end.

JSF Financial

Securities are offered through Mid Atlantic Capital Corporation (“MACC”) a registered broker dealer, Member FINRA/SIPC.
Investment advice is offered through JSF Financial, LLC, which is not a subsidiary or control affiliate of MACC.

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The information expressed herein are those of JSF Financial, LLC, it does not necessarily reflect the views of Mid Atlantic Capital Corporation (MACC). Neither JSF Financial LLC nor MACC gives tax or legal advice. All opinions are subject to change without notice. Neither the information provided, nor any opinion expressed constitutes a solicitation or recommendation for the purchase or sale of any security. Investing involves risk, including possible loss of principal. Indexes are unmanaged and cannot be invested in directly.

Historical data shown represents past performance and does not guarantee comparable future results. The information and statistical data contained herein were obtained from sources believed to be reliable but in no way are guaranteed by JSF Financial, LLC or MACC as to accuracy or completeness. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy. Diversification does not ensure a profit or guarantee against loss. Carefully consider the investment objectives, risks, charges and expenses of the trades referenced in this material before investing.

The S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock market.

IMF – The International Monetary Fund (IMF) is based in Washington, D.C. and currently consists of 189 member countries, each of which has representation on the IMF’s executive board in proportion to its financial importance, so that the most powerful countries in the global economy have the most voting power. The IMF’s website describes its mission as “to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.”

The MSCI Emerging Markets Index consists of 24 countries representing 10% of world market capitalization.  The Index is available for a number of regions, market segments/sizes and covers approximately 85% of the free float-adjusted market capitalization in each of the 24 countries.

The MSCI Europe Index captures large and mid cap representation across 15 Developed Markets (DM) countries in Europe*. With 447 constituents, the index covers approximately 85% of the free float-adjusted market capitalization across the European Developed Markets equity universe.

The Shanghai Composite Index (also known as the SSE Index) is composed of all stocks listed on the Shanghai Stock Exchange, including A Share and B Share stocks. The Index is weighted by total market capitalization to reflect price performance of listed stocks in Shanghai Stock Exchange.


[1] https://www.cnbc.com/2018/10/31/the-stock-market-lost-more-than-2-trillion-in-october.html

[2]  https://www.cnbc.com/2018/10/31/stock-markets-dow-set-for-triple-digit-gains-amid-earnings-results.html

[3] https://www.nasdaq.com/article/market-review-for-october-2018-cm1049139  and https://www.wsj.com/articles/imf-lowers-global-growth-forecasts-for-2018-and-2019-1539048878

[4] https://www.nasdaq.com/article/market-review-for-october-2018-cm1049139

[5] https://www.msci.com/documents/10199/f6179af3-b1d1-4df0-8ac9-215451f3ac0a

[6] https://www.msci.com/documents/10199/c0db0a48-01f2-4ba9-ad01-226fd5678111

[7] https://www.wsj.com/articles/imf-lowers-global-growth-forecasts-for-2018-and-2019-1539048878

[8] Source: https://www.nasdaq.com/article/market-review-for-october-2018-cm1049139

[9] Source: https://www.wsj.com/articles/fed-holds-rates-steady-signals-more-rate-increases-ahead-1541703706

[10] Source: https://www.bls.gov/news.release/pdf/empsit.pdf

[11] Source: https://www.nytimes.com/2018/10/05/business/bond-rates-economy-stocks.html and https://www.theatlantic.com/ideas/archive/2018/09/is-america-facing-a-labor-shortage/570649/

[12] Source: https://www.wsj.com/articles/split-congress-poses-new-obstacles-to-trump-1541609053?mod=article_inline

[13] Source: https://www.wsj.com/articles/hard-fought-governors-races-go-down-to-the-wire-1541560336?tesla=y&mod=article_inline

[14] Source: https://www.cnn.com/2018/11/06/investing/stock-market-midterm-election/index.html and https://www.cnbc.com/2018/11/06/stock-futures-open-flat-as-investors-await-midterm-elections-results.html

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