Oct 19, 2018 Market Update

Market Update

Stocks recently had their largest drop since February with the S&P 500 Index losing more than 5% in two days, although they have since staged something of a recovery. A combination of higher bond yields, a deepening U.S. trade conflict with China and elevated valuations all added up to the abrupt sell-off.  It is not yet clear how long or deep the sell-off will prove to be, but we know big drops can cause uneasiness and concern, so we wanted to share our perspective on the recent weakness and put the sell-off into context.

Despite the pullback, the backdrop for world equity markets remains generally favorable. The U.S. economy is in excellent shape. Consumer spending is growing solidly, consumer and business confidence is high, the job market is quite strong, manufacturing surveys are near record levels, and interest rates are still low. In addition, corporate profits remain strong. Consensus estimates are calling for a third consecutive quarter of 20%-plus growth in earnings for S&P 500 companies[1].

A key driver of the recent declines is that expectations have been growing that the U.S. Federal Reserve will continue raising short-term interest rates, which has led to a spike in bond yields. The fact that the Fed is also in the process of reducing its balance sheet as it winds down its quantitative easing program is also pushing yields higher. Interest rates moving off zero are bringing the market back to more normal conditions, complete with higher volatility.

Expectations of continued Fed rate hikes have been growing because of the strong performance of the U.S. economy, jobs growth, and accelerating wages, which are fueling concerns about inflation. Rising inflation increases the likelihood of further interest rate hikes. Higher interest rates translate into higher borrowing costs, which can dissuade consumers and businesses from making purchases and investments, weighing on companies’ profit margins and potentially slowing the economy. Looking ahead, we expect rates to continue to rise, albeit slowly.

Trade tensions are another factor capturing investor’s attention. Despite tough rhetoric from both sides, it seems likely that a trade deal with China will be reached, as both sides have too much to lose economically. In addition, the Trump Administration recently came to an agreement for a possible update to the North American Free Trade Agreement (NAFTA) with Canada and Mexico giving hope that a China trade deal could be reached. The amount of fiscal stimulus (through tax cuts and government spending) still far outweighs the tariffs that have been implemented or threatened.

Equity markets were wound tight and volatility is likely. The S&P 500 had gone 74 consecutive days without a 1% move-the 10th longest streak in history[2]. In addition, U.S. stocks, particularly growth stocks, had been trading at elevated levels. Given that U.S. equity markets have been rising for almost 10 years (after bottoming in March 2009) and that U.S. economic and corporate earnings growth have also been strong for a long period, these high valuations may reflect a view that current favorable fundamentals will remain for the foreseeable future. If this is the case, markets could be vulnerable to any developments that imply a weaker economic outlook.

Although pullbacks are always disconcerting, occasional periods of turbulence are to be expected. As of October 15th, the S&P 500 is just 6% off its all-time highs reached on October 3rd. Stocks have historically averaged a 7-9% gain each year, but they also tend to have three to four 5-10% drops and one 10-20% drop every year (data back to 1950)[3].

It is impossible to predict with any certainty whether the selloff will prove to be a temporary dip or something more serious. We encourage you to continue to take a long-term focus on investing. Downturns and volatility are a normal part of equity investing.

As always, please contact us with any questions you may have.


[1] Factset

[2] LPL Research

[3] LPL Research

IMPORTANT DISCLOSURES

Leonard Rickey Investment Advisors, PLLC (“LRIA”), is an SEC registered investment adviser located in the State of Washington. Registration does not imply a certain level of skill or training. For information pertaining to the registration status of LRIA, please contact LRIA or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).

This newsletter is provided for general information only and contains information that is not suitable for everyone. As such, nothing herein should be construed as the provision of specific investment advice or recommendations for any individual.  To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced herein is historical in nature and is not an indication of or a guarantee of future results. All indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

Your experience may vary according to your individual circumstances and there can be no assurance that LRIA will be able to achieve similar results for all clients in comparable situations or that any particular strategy or investment will prove profitable.   As investment returns, inflation, taxes and other economic conditions vary, your actual results may vary significantly. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. There is no guarantee that the views and opinions expressed herein will come to pass. This newsletter contains information derived from third party sources. Although we believe these third party sources to be reliable, we make no representations as to the accuracy or completeness of any information prepared by any unaffiliated third party incorporated herein, and take no responsibility therefore.

Stock investing includes numerous specific risks including the fluctuations of dividend, loss of principal, and potential illiquidity of the investment in a falling market. International and emerging markets investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Small cap stocks may be subject to a higher degree of risk than more established companies’ securities. The illiquidity of the small cap market may adversely affect the value of these investments. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. This newsletter should not be regarded as a complete analysis of the subjects discussed. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price. The risks associated with investment-grade corporate bonds are considered significantly higher than those associated with first-class government bonds. The difference between rates for first-class government bonds and investment-grade bonds is called investment-grade spread. The range of this spread is an indicator of the market’s belief in the stability of the economy. The fast price swings in commodities and currencies can result in significant volatility in an investor’s holdings. There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.

Any projections, forecasts and estimates, including without limitation any statement using “expect” or “believe” or any variation of either term or a similar term, contained here are forward-looking statements and are based upon certain current assumptions, beliefs and expectations that LRIA considers reasonable or that the applicable third parties have identified as such. Forward-looking statements are necessarily speculative in nature, and it can be expected that some or all of the assumptions or beliefs underlying the forward-looking statements will not materialize or will vary significantly from actual results or outcomes. Some important factors that could cause actual results or outcomes to differ materially from those in any forward-looking statements include, among others, changes in interest rates and general economic conditions in the U.S. and globally, changes in the liquidity available in the market, change and volatility in the value of the U.S. dollar, market volatility and distressed credit markets, and other market, financial or legal uncertainties. Consequently, the inclusion of forward-looking statements herein should not be regarded as a representation by LRIA or any other person or entity of the outcomes or results that will be achieved by following any recommendations contained herein. While the forward-looking statements here reflect estimates, expectations and beliefs, they are not guarantees of future performance or outcomes. LRIA has no obligation to update or otherwise revise any forward-looking statements, including any revisions to reflect changes in economic conditions or other circumstances arising after the date hereof or to reflect the occurrence of events (whether anticipated or unanticipated), even if the underlying assumptions do not come to fruition. Opinions expressed herein are subject to change without notice and do not necessarily take into account the particular investment objectives, financial situations, or particular needs of all investors. For additional information about LRIA, including fees and services, please contact us for our Form ADV disclosure brochure using our contact information herein. Please read the disclosure brochure carefully before you invest or send money.

INDEX DEFINITIONS

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. It cannot be invested into directly.

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Important Disclosures

Leonard Rickey Investment Advisors, PLLC (“LRIA”), is an SEC registered investment adviser located in the State of Washington. Registration does not imply a certain level of skill or training. For information pertaining to the registration status of LRIA, please contact LRIA or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).

This is provided for general information only and contains information that is not suitable for everyone. As such, nothing herein should be construed as the provision of specific investment advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. There is no guarantee that the views and opinions expressed herein will come to pass. This newsletter contains information derived from third party sources. Although we believe these third-party sources to be reliable, we make no representations as to the accuracy or completeness of any information prepared by any unaffiliated third party incorporated herein and take no responsibility therefore.

Any projections, forecasts and estimates, including without limitation any statement using “expect” or “believe” or any variation of either term or a similar term, contained here are forward-looking statements and are based upon certain current assumptions, beliefs and expectations that LRIA considers reasonable or that the applicable third parties have identified as such. Forward-looking statements are necessarily speculative in nature, and it can be expected that some or all of the assumptions or beliefs underlying the forward-looking statements will not materialize or will vary significantly from actual results or outcomes. Some important factors that could cause actual results or outcomes to differ materially from those in any forward-looking statements include, among others, changes in interest rates and general economic conditions in the U.S. and globally, changes in the liquidity available in the market, change and volatility in the value of the U.S. dollar, market volatility and distressed credit markets, and other market, financial or legal uncertainties. Consequently, the inclusion of forward-looking statements herein should not be regarded as a representation by LRIA or any other person or entity of the outcomes or results that will be achieved by following any recommendations contained herein. While the forward-looking statements here reflect estimates, expectations and beliefs, they are not guarantees of future performance or outcomes. LRIA has no obligation to update or otherwise revise any forward-looking statements, including any revisions to reflect changes in economic conditions or other circumstances arising after the date hereof or to reflect the occurrence of events (whether anticipated or unanticipated), even if the underlying assumptions do not come to fruition. Opinions expressed herein are subject to change without notice and do not necessarily take into account the particular investment objectives, financial situations, or particular needs of all investors.

For additional information about LRIA, including fees and services, please contact us for our Form ADV disclosure brochure using our contact information herein. Please read the disclosure brochure carefully before you invest or send money.