Over the past 8 weeks, the S&P 500 has erased its gains for the year and is now officially in correction territory with a 10% decline from it’s high. While these types of declines can be concerning, it is important to remember that 10% declines are not unusual. In fact, almost every year the stock market has a correction of at least 10%. This year, we have now had two 10% declines, including the 10% drop in February that now seems like a distant memory. We continue to believe that the appropriate approach is to think strategically and long-term, even taking advantage of declines rather than selling into them. Nonetheless, we are often asked what is happening in the market. Here are a few key items that seem to be bothering stocks and resetting price levels.
FAANG stocks are dropping back to reality. Facebook, Amazon, Apple, Netflix, and Google have been the market leaders once again this year. While these are all great companies, they have all risen sharply to very high price levels and they are giving some of those gains back and taking the indexes with them. For example, Apple is down more than 25% on lowered sales expectations for the iPhone. Similarly, Facebook is down 40% off its highs on declining users and missed earnings expectations.
Lowered 2019 earnings expectations S&P 500 earnings grew by 23% in 2018 and analyst expectations were that earnings would grow another 9% in 2019. Given the slowing growth of the market leaders, the 9% earnings growth for 2019 seems optimistic and the market appears to be resetting earnings expectations to a more reasonable growth level.
Hawkish statements from the Federal Reserve On October 3rd Federal Reserve Chairman Jerome Powell said that interest rates were ‘far from neutral’ indicating that the Federal Reserve was expected to keep raising rates for an extended period. This was different language than the Chairman had used previously. Consequently, the current correction began on October 4th. The concern for the market is that the Fed will raise rates too quickly and too high. In the past few weeks, various Federal Reserve governors have Powell’s statements to ease market concerns.
It is important to remember that economic data in the U.S. remains strong. Yes, the pace of growth is slowing but the data generally shows that the pace of growth is moving from very strong to strong. Since the market is forward-looking, it is readjusting to the new, more realistic pace of growth. These types of declines are a good reminder to be wary of risk and to stay focused on strategy and value rather than chasing the market as it rises. If you have any questions about your situation, please feel free to give us a call.