On October 31, 2018, the stock market (as measured by the S&P 500 Index) closed at 2,711, roughly 7% below where it started the month. Historically, not horrible price movement, but eye-opening nonetheless. This dropped the year-to-date performance to barely breakeven. Devastating news (to some) for a somewhat benign investment climate for the past few years (i.e., a lack of volatility)! So, the natural question is… “what gives… what changed with our sweet, beloved stock market?”
The market momentum has been halted, quite quickly. Rather than focusing on what’s been a strong economy, the herd of investors have turned their attention to newsworthy issues that continue to build what is known as the wall of worry. In theory, investors must climb this wall of worry in order for the stock market to resume its march upward.
What is this current wall made of, you ask? Well, search any news source (since they all love negative news) and you will find a plethora of potential issues building the blocks of said wall. To name a few:
· Italy’s budget crisis,
· A slowdown in global economic growth exemplified in China weakness, and
There is another half a dozen or, so we could list here. All of these are legitimate issues, but are they enough to derail a strong economy? Time will only tell. Historically, this country (and the rest of the world to a certain extent) ultimately works its way through these difficult global crises, but how long it takes is always up for debate. If there is need for intervention or assistance (i.e., monetary easing), that is the time the Federal Reserve needs to earn it’s keep.
Speaking of the Federal Reserve, it is here where we turn our attention to when dissecting this recent market correction… not the issues constructing this supposed wall of worry. We’ve seen this act before… like eight months ago in February.
Way back then, many of the issues above were building, but it was interest rates and how the Federal Reserve was going to manage them that got all the attention as the stock market corrected, to a certain extent.
In fact, the correction in February (-10.13%) was nearly identical to the recent October correction (-9.71%). This is more of a coincidence than anything else, but there is no doubt that the Federal Reserve and the anticipation of their pending moves to tighten monetary supply is a main reason for these corrections. You see, their decisions can and will have a lasting impact on the entire economy and subsequently the stock market. In addition, they should factor in all the wall issues when setting their monetary policy. As investors, this is where we will focus our attention as we look out to the long-term.