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Markets Move Lower on Data and Fears

On November 19th, our risk countermeasures triggered for the 2nd time this year, so we are back to a "risk-off" stance for portfolios using our Defined Risk Strategy. We thought this might be a good time to share a bit of information on what is affecting the stock market over the past 5 weeks, as volatility has spiked.

Before getting too deep into the drivers of the current market volatility, it is important to start first with a basic understanding of what moves the market higher or lower on a day to day basis.

Daily market movement is not an indicator of the current strength of our economy. The market actually moves on expectations of increasing or decreasing earnings in the future. Today’s economy is stronger than it has been in a very long time, but the market is reacting to signals that future earnings growth may be slowing.

Here is some of the information that has come to light in the past 30 days that suggests that earnings may be slowing –

1. Global Manufacturing data showed a 15% slowdown in manufacturing orders in the October period compared to 6 months ago. This data has become a fairly consistent predictor of economic acceleration or deceleration in the global markets.

2. Beige Book report data at the end of October showed that wage inflation has risen significantly around the country, and cited that in 8 major U.S. cities higher wages are severely impacting corporate profits. This trend is expected to continue as a result of the President’s nationalism initiative.

3. S&P companies earning season is underway and many large growth companies fell short on earnings expectations (like many tech companies). Furthermore, many of these large companies are now forecasting future earnings growth to be lower than previously expected.

4. Mid-term elections yielded a divided Congress, which substantially reduces the probability of further tax-cuts or other economic stimulus measures in the near-term as many of the stimulus items from the 2017 Tax Reform Act expire.

5. U.S. China trade relations continue to deteriorate which is causing U.S. companies to pay higher input costs to utilize more U.S. based resources to manufacture products.

All of these things combined begin to paint a bleaker economic growth forecast, influencing much of the institutional asset managers’ willingness to buy shares of stocks on market dips.

At the same time, retail investors may have an under appreciation of risk, since a large percentage of these investors with limited investment experience may have only invested in this current bull market cycle, and have not ever endured a severe market downturn (since we have not had one in 10 years.)

Each day, it seems that we are seeing a bit of a tug of war between these 2 investor groups. Ultimately, the market will move in the direction of where earnings are going. At this moment, the market bulls are hoping for better than expected holiday season results and a “Santa Clause rally” in the market, while the market bears have mounting fears that a recession is looming.

Bringing all of this information to its application, none of us have a crystal ball. Trying to predict the short-term direction of the markets is a fool’s game. We do know that over 80 of the worst 100 days in the market (since 1950) have occurred once the market falls below its 200-day moving average (source Standard & Poors). With increased probability for large losses to occur, we can actively choose to park money on the sidelines when the market moves into this negative territory. That is where we are at today.

In addition to shifting equities to short term bonds and money market positions, we also increased holdings of high quality bonds a few weeks back during the first wave of this negative information to begin to position our clients for a potential market correction. We will continue to update you on developments on this front.

Please try to keep the perspective that these market cycle changes are a normal part of investing. We will make every effort to take advantage of these changing dynamics on your behalf.

As a reminder, our defined risk strategy is not a market timing mechanism. It is a quantitative trend following strategy designed to protect investors from large losses that can stem from fear selling in the markets. For more complete information about the strategy, please visit

If you would like to discuss your specific situation, please feel free to call us at anytime.

BOTTOM LINE: More information continues to point towards earnings growth slowdown. As the market attempts to price this information, volatility is expected. We will continue to make prudent adjustments as we go.

Thank you,


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