Yesterday marked one of the worst trading days in 2019. Let's take a closer look at the reasons for the decline and what we can expect going forward.
Yesterday, the Dow Jones Industrial Average declined as much as 2.9% and the S&P 500 retreated 2.98%, making it one of the worst trading days of 2019. The market declines were triggered by the news that China allowed its currency, the Yuan, to fall to its lowest levels in more than 10 years—above 7 Yuan per U.S. dollar. Beyond the currency decision, China also suspended purchases of U.S. agricultural products and threatened their own tariffs going forward against U.S. farm goods.
One thing we know for sure is that investors don't like uncertainty. It just so happens that the US-China trade situation is the real-life caricature of uncertainty. We could still be another 6-12 months away from a deal and any news (good or bad) seems to result in the market reacting accordingly. We have seen a new world of volatility for a couple of years now. We expect the markets to continue this course.
Let’s put this volatility in perspective. When looking at S&P 500 corrections of more than 5% since March 2009, you’ll notice that such big corrections occurred 3-4 times every year over the last decade; a decade that has seen markets more than double in value. The U.S equity market can sell off because of a variety of reasons and many of them don't last. Why? Because many of them are due to non-U.S. related economic events. The pull-backs are fundamentally not about the health of the U.S. economy. However, the U.S. financial markets happen to be a wonderful reflecting pond of sorts, in that they pick up on everything happening globally, and often magnify the underlying reality. Towards the end of yesterday’s market volatility, the indices started to recover and continue to do so today. Trading volume is currently low because we are in the depths of summertime. We believe that as the emotion of yesterday wears off, stocks will move higher and recovery will take place.
So what do we do now?
We plan on volatility, build it into your portfolio design just as you would engineer your house in California for the likelihood of an earthquake at some point.
Our portfolios are positioned as defensively as they've ever been.
We continue to monitor the markets and make changes if necessary.
Please don’t hesitate to reach out to us with any questions or comments.