Brief Thoughts on Market Selloff | October 12, 2018
October 12, 2018
Since the content of this CFO Report was written, the equity market experienced two difficult trading days. After reaching new historic highs in late September, the S&P 500 has now sold off by more than 7% with much of that weakness occurring over the last two days. Market pundits have been busy trying to pinpoint the exact cause of the weakness, but like the equity markets themselves, the debate remains unsettled.
As is often the case, there is not a sole reason or a simple answer. At the risk of sounding flippant, part of the weakness can be attributed to the very nature of equity returns. Equities have and likely always will be volatile. Their nature is to “go up an escalator and down an elevator”, sometimes in short time periods. There are legitimate and more fundamental concerns being raised by investors. Interest rates have been increasing, trade rhetoric with China has escalated, and valuations are still expensive; all true, but none of which are new (certainly not in the last few weeks). Additionally, all the conditions that led to the new highs in September – accelerating economic growth, strong corporate earnings, low unemployment, etc. – are also still true.
What are we to make of the recent weakness, then? It’s impossible to know for sure, but it’s likely some combination of the various elements we’ve cited. We’ll even throw in two more likely culprits, program trading and technical selling, as both almost certainly exacerbated the moves over the last two days.
What is important for equity investors to remember during these periods is that this is neither the first nor the last time that equity markets experience sudden and difficult to explain weakness. While painful, it is a natural part of investing and more importantly hasn’t hindered long-term returns for investors who stay the course. We encourage you to dig into this issue of Your CFO Report to read more about our market and economic overviews, to learn more about educating your entire family on your financial plan and other timely financial and investment topics. Thanks, as always, for reading.