As you are likely aware, the market is trading lower again today on worries related to the coronavirus. And now you will see the news media running “breaking news” stories about a market correction. As I have written in the past, the market experiences downward, and often dramatic, moves lowers on a somewhat frequent basis. Below is an article I sent in the fall of 2018 when the market was worried about US-China trade issues. When I sent that email, the Dow was trading at roughly 25,500. Today, the worry is a new one but the Dow is now coming off a record high of 29,500. Markets go up and markets go down but as long as corporate profits keep rising, the market will likely move higher as well.
As I said in my last post, I do not think the coronavirus will have a long-term impact to corporate profits, especially for the kinds of companies in your portfolios. At the same time, we are always on the lookout for something that suggests we need to make meaningful changes in your portfolios. I don’t think we’ve seen that something yet.
If you have questions or would like to chat, please let me know.
How do we know whether or not it’s time to sell?
Last week’s drop in the S&P 500® marks the 27th 5%+ pullback of this bull market and the third of 2018. We do not take these market moves lightly, but it is also important to put them into context — both relative to history and relative to the fundamentals. 5%+ pullbacks have historically occurred three times per year going back to 1928. Of those, less than 20% turned into 15% corrections and roughly 10% turned into full-blown bear markets. Given the frequency of short-term pullbacks, we rely heavily on the fundamentals to help us determine whether or not to sell.
We believe that in order for this pullback to turn into a bear market, we would need to see signs of a profits recession, significant tightening up of liquidity and/or unrealistically bullish investor expectations. We see none of these signals today. While overseas profit fundamentals have slowed, we think investors may still be underestimating the nominal profit growth potential here in the US. Meanwhile, liquidity remains ample and the fears of a 2008 repeat remain.
