The US equity markets had a significant selloff on Tuesday 12/4/18.  After being closed on Wednesday for the day of mourning for President George H.W. Bush, the selloff has resumed today.

The catalyst today seems to be the arrest of the Chief Financial Officer of Huawei, a major Chinese technology company.  This put additional uncertainty into the potential for US/China trade negotiations.

While the markets were closed yesterday, I took the opportunity to meet with members of the JPMorgan Global Strategy team.  One of my key takeaways is that while volatility and market declines never feel good, most of the time they are just part of a normal market cycle.  Long-term moves in the financial markets are produced by economics and fundamentals; short-term moves, however, are produced almost exclusively by news flow, sentiment, and technical levels on the price charts.

The chart below highlights this well.  The grey bars show the calendar year return for the S&P 500.  The red dots show the maximum intra-year decline during each year. Despite average annual intra-year declines of 13.8%, annual returns have averaged +8.8% per year, and have been positive in 29 of 38 years since 1980.  Even recent years support this:  2016 had an intra-year decline of 11% but still finished the year +10%.

Right now, 2018 is looking like 2015, which had an intra-year decline of 12% but finished the year basically flat (down just 1%).  That’s roughly where we stand YTD 2018 as I write this report.

My read is that the recent volatility is being driven by news flow (trade/interest rates) and technical levels being crossed.  The economy and market fundamentals (corporate profits), while perhaps softening, remain positive.

I share this with you to try to ease your concern that something really bad is happening.  We continue to monitor the situation and your portfolio and will adjust accordingly.

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