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Don’t Try to Catch a Falling Knife

Posted November 2, 2018

You are not going to like your October statements. The U.S. and international stock markets have entered correction territory

— as defined by a 10% decline or more from prior peak. History shows that markets average one 14% annual decline. At times like this it is important to remember that stock markets gain almost three out of every four years or 75% of the time, and over the long-term markets significantly beat inflation. Corrections are uncomfortable but normal and healthy for the stock market. When you see the loss on your October statement, it may be tempting to stop the bleeding and leave the market, but catching a falling knife will always make things worse.

Don’t Bet Against America

On October 31, Automatic Data Processing (ADP) reported that the number of U.S. private payrolls increased by 227,000 in October. Wall Street economists were expecting growth of 189,000 compared with 218,000 in September. The pace of U.S. job growth is not slowing down. In the past 12 months, the U.S. economy as measured by Gross Domestic Product (GDP) grew at a 3% pace, which is roughly 50% acceleration from the 2.1% average growth rate from mid-2009 through early 2017. It is clear that cutting taxes and slashing red tape have boosted economic growth, and the U.S. stock market still has room to run. More growth means higher earnings means a higher stock market, and there are no signs of a recession on the horizon.

Don’t Sweat the Mid-Terms

Since 1945, there have been 18 U.S. mid-term elections. The S&P 500 has posted a positive total return in each of the calendar years following the previous 18 mid-terms with an average gain of 19.13%.This is an impressive record. Elections always produce a degree of uncertainty which markets do not like. Once the uncertainty passes, investors can focus on earnings growth and other fundamentals. Even if the Democrats were to take back the House and the Senate (which is unlikely), President Trump and the Republican Party would have veto status to block any attempt to roll back the tax cuts.

Don’t Give Up on Your Bond Allocation

Most bond funds were down in October but not nearly as much as stock funds, which is why bonds are good for diversification and risk mitigation. Interest rates may be close to a peak, and inflation expectations are declining, both of which will be good for bonds. And, don’t give up on international funds where you can buy a dollar of earnings at a 31% discount compared to the S&P 500.

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