Global equity markets officially entered correction territory over last 2+ months, dropping over 10% from previous highs in September through October with significant volatility through November. This week markets began to rebound again, finishing both the week and the month in positive territory. Uncertainty remains a theme, highlighted by surprisingly dovish sentiment from the Federal Reserve given their recent comments, continuing trade discussions and the G20 Summit as well as the usual political mudslinging from both sides of the aisle.
- Monday – U.S. Stocks climb higher, led by retailers, including Amazon as well as brick and mortar companies like Target, Macy’s and Kohls.
- Monday – Crude Oil began to rebound after the largest one week decline since January of 2016 related to concerns of oversupply.
- Tuesday – President Trump threatens to cut subsidies to GM after they released plans to end production at plants in Michigan and Ohio.
- Tuesday – U.S. Markets continued to climb after optimistic comments about progress in trade talks with China at the G20 from Larry Kudlow, Director of the National Economic Council.
- Wednesday – Federal Reserve Chairmen Jerome Powell announced that he believed interest rates were “just below” neutral rates, leading investors to believe that the pace and duration of rate raises in the U.S. might slow going forward.
- Thursday – Trade tensions between U.S. and China appeared to ease as Washington announced that it would hold off on implementing further tariffs and plans for Presidents Trump and Xi to meet during the G20 Summit.
- Friday – President Trump signs a trade deal with Mexico and Canada meant to replace NAFTA, congressional approval is still required.
Equity volatility continues to be elevated relative the past two years, although it is well within normal ranges. It is important to remember that a correction does not necessarily indicate a longer-term drop, nor is there a guarantee of a bounce back. During the recent correction, some of the largest sectors and companies were hit the hardest, specifically the Technology sector and “FAANG” stocks that have driven much of the positive market performance over the last two years. A portfolio that applied an equally weighted approach to sector and individual company allocation would have reduced risk and downside vs. a passive capitalization weighted investment like a low-cost index fund, for instance.
Investors who remained disciplined during the last two months have been rewarded this week with a global rally across most asset classes. While there is still quite a bit of geopolitical uncertainty top of mind, there were encouraging signs this week for global markets.
A slow down in the pace of rate raises in the U.S. may provide some relief to fixed income investments as rising rates are typically a headwind to fixed income prices. Additionally, this has the potential to slow or reverse the rise of the dollar which could provide relief to international developed and emerging market companies with dollar denominated debt and boost U.S. exports as they could become less expensive to international buyers.
A correction is often healthy, we have been in a record long bull market and bears have long considered the U.S. Equity market to be overvalued. We would much rather see natural corrections occur periodically than large bubbles form and burst. In addition, the potential for trade agreements to be reached and implemented may provide additional relief to global equity markets which have experienced substantial headwinds to growth.
It is certainly possible that global markets could continue their decline for an extended period, in which case the ability to remain disciplined and diversified should be valuable to investors. We believe that Personal Capital portfolios are well positioned to navigate choppy markets moving forward. As certain asset classes, sectors and companies are hit harder than others, opportunities to tax loss harvest and rebalance portfolios as prices drop will present themselves. By buying into asset classes as they fall, rather than rise, portfolios may be able to take advantage of lower prices, assuming of course, that over the long-term markets tend to rise.