Fear in Today’s Stock Market in October 2018
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To all our CFE Finances customers and fellow investors: October has been a tough month to be in the stock market, and we want to help you navigate the downturn. Fear has driven the sell-off. And why wouldn’t investors be afraid after watching their gains in stocks, mutual funds, and ETFs (exchange-traded funds) fall on 13 of the last 15 trading days? The challenge is how to sit with a shrinking portfolio without selling solid, well-researched holdings. Many stocks have dropped even after reporting higher quarterly sales and earnings that beat analyst estimates. To be fair, some companies have been hit on weaker forward guidance. But a lot of this is fear — driven by headlines about higher interest rates and the impact of China tariffs on companies’ cost of goods.
We understand if some investors have sold into the weakness and locked in gains. If you need the money in the near future, selling is reasonable. If you don’t, and you own high-quality names, we think staying fully invested is the better long-term move. Future retirement contributions will continue to flow into stocks, and plenty of cash will return to the market once prices bottom out. Other options include moving some positions into cash — just remember that in an after-tax brokerage account you’ll owe capital gains on the profits — or, if you’re close to retirement, shifting a portion into an annuity. For more on that, see our newsletter on fixed annuities.
No one knows exactly why stocks are oversold, but many economists and outlets like CNBC and Fox News are pointing at the Federal Reserve for raising rates. The Fed chair has signaled he remains hawkish, with another hike likely in December and as many as three more in 2019. Stock investing always carries risk, but the long-term rewards have been meaningful.
U.S. banks are selling off on concerns that higher rates will weigh on future earnings. On October 24, 2018, U.S. housing prices were reported down 5.5% — exactly what higher rates are designed to do to cool inflation. On top of that, tensions with China over tariffs have added uncertainty, and investors are wondering how long the trade war will last. Worth noting: the Chinese stock market is down more than 20%, and markets in Japan and Europe are also down. Volatility has picked up globally in October.
We need a strong stomach for this sell-off and patience for the recovery. History shows that, over the past 30 years, sell-offs have consistently led to market upturns. Investors have to take the good with the bad, especially if retirement is still years away. We believe that once October is behind us, the market will start to climb again, with buying and selling driven by fundamentals and technicals instead of fear. Stocks posting strong sales and earnings should be rewarded. One extra reason October is often rough: it’s when many fund managers lock in profits to dress up their year-end performance for clients.
It may feel counterintuitive, but a sell-off can actually help a long-term portfolio. In a workplace retirement plan, every paycheck contribution now buys mutual fund and ETF shares at lower prices. Buying lower pays off when the market recovers. Reinvested dividends go further too, because they pick up more shares at discounted prices. Wealth compounds over time, and buying at lower prices accelerates that compounding. Stocks on your wish list are now on sale, and fresh market lows often set the stage for longer bull runs. Stay invested for the long haul in great U.S. companies. Happier days are on the way. Keep doing the research on your existing positions and your next ideas. Most importantly, invest in great companies — their share prices will rise as they grow sales and earnings. If you have any questions, please email us from our contact page. Happy investing!