First reported on February 8, 2018.
Market activity in recent days has been much more volatile than anything we have experienced over the past year. This current period reminds us of the old Wall Street adage “markets take the stairs up and the elevator down.”
FineMark’s investment group has been closely monitoring the markets and key inputs during this period of elevated volatility. First, we have been expecting a pullback in equities for quite some time and we consider this market drop an overdue reality check. While Monday’s decline of 1,175 DJIA points was the largest single-day drop in history, from a percentage standpoint, it was not record-breaking. The S&P 500, a more broad based domestic market index, is 6.7% lower since equities began to sell-off on January 26th through Monday’s close. It was an aggressive sell-off by any measure, but again, not unprecedented. It is also important to remember the S&P was up 5.7% in January, which we believe was too far, too fast.
The ferocity of the current period is being driven by a few primary factors: a move upward from the record low levels of market volatility we had experienced for most of 2017, the significant move up in long interest rates and the significant sell-off in cryptocurrencies.
When we analyze equity markets at FineMark, we consider momentum, valuations, earnings/margins and the overall macro-economic backdrop. As we have detailed in our prior publications, valuations have been running above average for quite some time. However, valuation is a particularly poor market-timing tool, except at extremes. All of the other metrics we evaluate continue to flash a green-light as it relates to risk taking. If the macroeconomic picture is intact, which we believe it is, earnings will determine market prices over the long term. If we see a reduction in corporate margins and earnings weakness, our view will change, however this is not currently the case.
As a result, this move in markets is not significant enough to cause us to change our current asset allocation guidance. We strongly urge our clients with portfolios overly exposed to equities, to rebalance back to their long-term asset allocation while keeping with their own goals and objectives. Clients may also want to consider the inclusion of alternatives into their allocation as these strategies can help to buttress portfolios during periods of equity market tumult.
We thank you for your continued confidence during this more turbulent market period. Please reach out to your private wealth advisor if you have any questions or concerns. We are always available to take your call.