Capital Brief: Correction 2.0

October 24th, 2018|

Down market days like today are never much fun (unless you happen to be the lone winner in last night’s $1.6B Dollar Mega Millions lottery, in which case you might not mind so much). For the rest of us, volatility continues to rise as markets digest the rising risks stemming from tightening financial conditions, increasing geopolitical tensions and wavering short-term economic data.

Many domestic and foreign stock markets are now in (or near enough) correction territory. The natural questions that arise are, “are we at the start of a bear market?” or “are we headed towards recession?” Our answers to those questions would be, “we’re not sure but don’t think so,” and “not even close.”

While we cannot predict the near-term swings in market price action, the Capital Planning Advisors Investment Team remains confident that the fundamental case for equities remains positive. Indeed, looking under the hood of YTD market performance shows that 2018’s tepid returns are explained by contracting Price/Earnings multiples, even in the face of outstanding corporate earnings growth.

Source: Cornerstone Macro Partners Oct 23, 2018

How about the rest of the world? 90% of global Purchasing Managers’ Indexes (PMIs) remain in expansionary territory, global headline inflation is up at a reasonable 3% rate and total global debt is down 2.2% year over year. Real GDP and Industrial Production are up 3.1% and 2.9% respectively. Monetary policy remains extremely accommodative and fiscal thrust is taking hold in the US and China. Domestically, labor markets remain strong, inflation is tame, and confidence is persistently high. Housing starts are down a bit, but that’s to be expected with increasing mortgage rates. In short, the backdrop is still positive.

That said, we remain mindful of the increasing market risks and have been raising cash by selling out of a few weaker holdings, and tilting the remaining assets a bit more defensively as we wait for this recent action to settle down some before redeploying capital at more attractive levels.