As of the close yesterday (Dec 18th), the S&P 500 is down 13.1% since it's peak on September 20th, and down -4.8% Year to date. Equally as alarming to many investors are the swings that have occurred, day to day. There are many issues dominating headlines that are causing this uncertainty and volatility:
- Potential US Government Shutdown
- Potential Fed Tightening
- Flattening Yield Curve
- Slowing China Growth
- Weak Energy Prices
- Tariffs / Trade Wars
- Brexit Uncertainty
- Italian Budget Crisis
- ... and others???
All that said, there are always concerns in the in the world or potential issues that could spread across the markets: think about Greece, and European banks, or even Brexit at the time of the referendum.
We view the recent market pullback as a normal correction in this late stage of a bull market. Yes- there are signs that the global economy could be slowing, however it is still growing, and all indications are that there is no recession coming in the near future. My previous blog discusses this in detail, and is still relevant now.
One of the most common ratios that investors look at when evaluating a stock's attractiveness is the Price Earnings ratio (P/E ratio). Simply put, this is how much a company's stock is trading at, versus how much it is earning. Different industries have different normals of what range that P/E should be in, but the S&P 500 has dropped from approx. 19.4x to approx. 15x through this correction. In general terms, this means stocks have moved from "expensive" to "normal", and when you consider that with the fact that the economy is expanding, then this is a positive sign for the markets moving forward.
This doesn't mean that the correction has hit its bottom: the market trades on emotion from day to day, and we expect volatility to persist into the early part of 2019, but it does mean that there are signs for optimism.