Monday, October 26, 2020

Buckle Up

Ask the CFP

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“A year from now you may wish you had started today.” ~Karen Lamb, English Author 

Question: What are your thoughts on the market pullback earlier this month?  

Answer: In the days prior to and immediately following Labor Day, stock markets fell dramatically. Not surprisingly, the biggest declines were in sectors with the strongest year-to-date returnsHere are ten points that may help put the decline into perspective.  

1) This Is the First Three-Day Decline in Three Months 

It’s unusual for the equity market to go straight up without interruption. In fact, this recent three-day pullback marked the first three-consecutive-day decline since June 11 and only the second since March 10. On average, we typically experience about 10 individual periods of three-consecutive-day declines over a six-month time period, or on average, almost twice a month.  

2) We’re Back to Levels of One Month Ago 

Despite the decline from September 3 to September 8, as this is being written, markets are close to levels seen just one month ago. Volatility is part of the fabric of the market. 

3) Right Now, This Is Still the Second Strongest Bull Market 

Even with the recent weakness, we were up strongly from the March 23 lows. This marks the second strongest start to a bull market at this juncture (117 days) on record, just below the record of 52% in 2009.  

4) We’re Coming Off the Best Summer Since 2009 

Even with the recent pullback, the S&P 500 posted the best summerup 16% from Memorial Day to Labor Daysince 2009, and the secondbest in the last 50 years. This reflects how strong the recent momentum in the market has been despite continued COVID-19 and political uncertainties. 

5) HistoricallySeptember Has Been the Weakest Month 

On a historical basis, Septemberparticularly during an election yearhas been the weakest month of the year. While volatility tends to increase during September and October, market pullbacks have on average been relatively contained and offset by a rally in November and December. 

6) Pullbacks Are Normal 

Not only have markets rallied strongly and very quickly, it is not uncommon to see pullbacks in a given year. In fact, over the last 30 years, the market typically experiences at least three 5% or more pullbacks a year, on average. Year-to-date, this is only the third.  

7) The Economy Is Improving 

Evidence of this includes an improving labor market report1.4 million jobs added; unemployment rate fell to 8.4%and a strong Institute for Supply Management (ISM) readingthe new orders subcomponent rose to the highest level since 2004last week, the U.S. economy continues to recover from COVID-driven weakness. Improving economic activity should remain supportive for U.S. equities. 

8) A Phase 4 Relief Package Is Still Expected  

Both political parties continue to jockey around a Phase 4 stimulus packageFurther fiscal stimulus, particularly targeting the consumer, should be supportive of both consumer spending and the equity market. 

9) Earnings Are Improving 

While earning expectations had been slashed following the COVID-driven crisis, earnings throughout the second quarter came in significantly better than expectations. This trend is expected to continue in select sectors.  

10) U.S. Equities Remain Technically Sound 

Despite the recent pullback, U.S. equities remain above both their 50-day and 200-day moving averages. Technicians will look for these to remain levels of support. Staying above these moving averages portrays a technically sound equity market. From a sentiment perspective, several technical indicators suggested stocks were overbought and in need of a consolidation period.  

The Bottom Line 

Given how far and fast the equity market had rallied, it’s not surprising to take a pause. As valuations on both a trailing and forward basis remain near multiyear highs, the market was priced to perfection and susceptible to disappointments.  

Near term, market activity is likely to remain impulsive and capricious. Reasons include all the usual suspects like a potential COVID-19 vaccine, fiscal relief deliberations, the upcoming presidential election and ongoing tensions with China. With this in mind, the outlook for select U.S. equities is expected to be higher over the next 12 months. This is based on continuing positive trends with global economic activity, recovering earnings and still-supportive fiscal and monetary policy. Stay focused and plan accordingly.  

Source: Fact Set the S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. It is not possible to directly invest in an index. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. The opinions expressed are those of the writer as of September 9, 2020, but not necessarily those of Raymond James and Associates, and subject to change at any time. All information provided herein is for informational purposes only and is not intended to be, and should not be interpreted as, an offer, solicitation, or recommendation to buy or sell or otherwise invest in any of the securities/sectors/countries that may be mentioned. 

“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.” This article was provided by Darcie Guerin, CFP®, First Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239389-1041, email darcie.guerin@raymondjames.com. Website: www.raymondjames.com/Darcie. 

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