Can we get an umbrella?Submitted by Prosperity Advisory Group on October 17th, 2018
by Paul Ewing, CFP®
Scary October market sell-offs are thrilling but, not funny. We are reminded that we had a similar event in February (largely forgettable). We have no assurance this event will be as forgettable, but it is a great time to be reminded:
- Asset classes have different degrees of volatility and that is why portfolios are diversified across many asset segments
- Even within stocks, industries and size of the listed companies often react to different degrees
2019 is particularly interesting as you look at the four main asset categories: Bonds, Money Markets, Non-US Stocks, US Stocks.
- When interest rates rise, bond prices fall
- Money market rates are still very low
- Trade tariffs are disrupting global trade
- So does that make US stocks the only game in town?
- As of June 18 the Commerce department reports Real US GDP growth to be 4.2% from previous quarter (source: Factset Research Systems)
- As of September 2018 the Bureau of Labor Statistics Report reports Civilian Unemployment at 3.7% a level not seen in 20 years (source: Factset Research Systems)
- Through August 2018 consumer spending had risen 5.33% from the previous year. (source: Factset Research Systems)
So is there a safe investment category?
Certainly some are “safer”, but perhaps not always, but often, safety is in the bargain.*
A bargain is not necessarily just a discount (sometimes prices are low for good reason). But rather, when investment dollars are flooding into undeserving stocks and ignoring equally deserving stocks.*
We are potentially seeing that play out in the US stock market.
Let’s look at stocks.
Growth stocks can be represented by the blue line. Growth is defined by companies with dramatically higher Earnings per Share Growth. These are companies that for good reasons are making great progress. Often these stocks price with a well-deserved higher multiple.
Value stocks are the green line. These stocks may or may not have the same earnings growth, for a variety of reasons they are not fetching the same prices relative to their earnings.
Typically these categories trade much alike. But there are times when that is not true and today is one of those times.
This is an unusual item on our radar screen and we wanted you to know we continue to monitor the economic and relative value data for opportunities and frightful threats!
*Investments in securities do not offer a fix rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and, when sold or redeemed, you may receive more or less than originally invested. No system or financial planning strategy can guarantee future results. Therefore, no current or prospective client should assume that future performance or any specific investment, investment strategy or product will be profitable.