Yesterday the DOW fell 831 points closing at 25,598, the largest drop since February 8th of this year. Fear of unknowns carries the turmoil of market decline. The catalyst for the drop can be seen in several areas of our economic, political and emotional environment: 1) reports on corporate profits, 2) political uncertainty, 3) October memories.
Briefly, let’s look at each of these.
The fear of slowing corporate profits causes market declines. PPG reported weaker profits due to a combination of higher raw material costs from tariffs and reduced demand for its products in anticipation of an economic slowdown.
The fear of political uncertainty caused by the upcoming midterm elections and the future stories we create about which party will win control over either the House of Representatives or the Senate or both.
The fear of past market events that leave an embodied memory of doom cause repeated events. In the month of October, we often see noteworthy drops in equity prices. The 1987 market decline began October 19th and the 2008 market decline started September 28th.
These types of one-day drops happen and the US equity markets typically bounce back quickly. Back in February of this year, the same fears of political turmoil, an economic downturn, the trade war with China and the interest rate rise caused large declines in the US equity markets on February 2nd, 5th and 8th, when the DOW fell approximately, 666, 1,175 and 1,033 respectively. At that time, you heard from us in the CK Bulletin about the health and strength of the US economy and suggested to pause, remain clear headed and be in the present time recognizing you are ok. We suggested the equity markets were not shifting from a bull market to a bear market at that time. Eight months later, today, the US economy is still strong, though not as strong as it was in February.
The forces that helped create the rising equity markets, economic growth,
relatively low interest rates, fiscal stimulus and business deregulation continue to exist.
The positive factors supporting the US equity markets from entering a bear market at this time: 1) although the US economy is slowing, it remains strong with better than 3% growth and unemployment at historic lows. 2) the US has trade agreements of understanding with the Euro Zone, Canada, Mexico, Japan and other countries; China is the only major trading partner that the US has a trade dispute. 3) although interest rates are rising, they are still near historic lows. 4) the US has navigated one party controlling the white house and another congress without the country imploding economically.
Negative factors to recognize: 1) the US continues to lack trade consensus with China 2) the presence of political uncertainty due to midterm elections 3) the rising interest rate environment. 4) The slowing pace of US and World economic activity.
We cannot predict whether the DOW and other equity markets will drop further before starting to rise; but we do know the DOW and other equity markets will rise again, if history over the past hundred plus years is any indication. Most important, as we maintain without doubt, continuing to view and manage your investment plan in relation to the goals of your life that matter most, is the surest way to continue to sustain and grow your wealthy life. With over 30 years of serving you in the financial planning profession, we are steadfast and stable in this truth.
Resource:
