February Monthly Outlook – Catalyst for Correction

The stock markets started 2020 right were they left off in 2019 – a steady climb to new all-time highs.  What was driving the market higher?

I would call it “peak happiness” – a wonderful mix of a high level of valuation, investor confidence, financial liquidity and risk appetites.    In fact, stocks were almost back to where they were in 2017 when they hit “peak happiness,” marking the highest level achieved during this decade-long bull market.

2.4.2020_MONTHLY_OUTLOOK_CHART_1

Similarly, trader sentiment and hedge-fund positioning were almost — but not quite — as unreservedly aggressive as they were then, as investor surveys and the patterns in options-trading volume confirm. Bespoke Investment Group calculates the market has been statistically “overbought” 98% of all days since October, the longest such stretch since late-2017-early 2018.

While stock gains and all-time highs are great, the underlying fundamentals leave the market vulnerable to a sudden correction when any of these “happiness” factors reverses or an unexpected catalyst appears.  And many times, the more extended the stock market is, the farther it falls when the happiness ends. The catalyst for the correction back in late 2017 was rising interest rates, tightening liquidity and recession fears.  This time the catalyst is the coronavirus.

Financial markets hate uncertainty and widespread medical emergencies fit in that category.  Historically, there is a negative short-term reaction to these types of catalysts, but long-term results have generally been positive.

Economists currently estimate the outbreak could lower China GDP (gross domestic product) by 1%.  The impact on the US economy will be less as our GDP is more dependent on domestic demands.  The world economy, however, may slow back towards stall speed (less than 1% growth) as China has been a major driver of global growth.

What does it all mean to you?

In the short-term, stocks will certainly be more volatile and likely to continue to fall. Longer term, the US economy looks stable and capable of managing through.  However, much depends on how widespread the coronavirus spreads and how long it takes authorities to get it under control.

While my cautious approach in the late fall of 2019 looked wrong-footed given the equity market gains at the end of last year, I am glad we remained neutrally positioned as that bodes well for this period of uncertainty and volatility.

Please call me if you have any questions or concerns about the markets, economy or your portfolio.

We have added a new tool to help those nearing or just beginning retirement to explore their readiness for retirement.  It’s an easy interactive tool.  Please share it with family, friends and colleagues.

https://www.ready-2-retire.me/JimMcCarthy

 

February Calendar of Events   (comments and additions for future months are always welcome)

  • February is Black History Month.  Let’s all strive for understanding and acceptance for people of all colors, nationality, and religions.

February  2nd                   Groundhog Day – yay he didn’t see his shadow. No let’s hope he’s reliable!

February 14th                  Valentine’s Day

February 17th                  Presidents Day

 

P.S. Thank you for your referrals. They are making a big difference in my practice. Feel free to share my name with your friends on Facebook or LinkedIn.

 

Sources:  Julex Capital, FactSet, CNBC, Bespoke Investment Group

Although information herein has been obtained from sources deemed reliable, its accuracy and completeness are not asserted. All opinions and estimates included in this report constitute the judgment of the financial advisor as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

Investing involves risk and you may incur a profit or a loss. Diversification does not ensure a profit or ensure against a loss. There is no assurance that any investment strategy will be successful.  Past performance is no assurance of future results.

Please consider the charges, risks, expenses and investment objectives carefully before investing. Please see a prospectus containing this and other information. Read it carefully before you invest or send money.

Information provided should not be construed as legal or tax advice.  You should discuss any tax or legal matter with the appropriate professional.

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