The December market meltdown explained

S&P 500 is down almost -16% so far in the last quarter of 2018. The market rout which started in October continued with a powerful selloff in December. The technology-heavy NASDAQ is down -20%, while the small-cap Russell 2000 dropped nearly -22%.

Despite our strong economy major buyers remain on the sideline and retail investors are looking for a bottom..

In my previous article, I talked about the perfect storm that started the market drop in October. Since then more negative news continued to bombard the markets. The markets do not like uncertainty.

Here are some of the factors that triggered fears across the sellers.

  1. Apple stopping to report iPhone sales
  2. FedEx reporting lower guidance for 2019
  3. The resignation of General Mattis
  4. Government shutdown
  5. Failing Brexit negotiations
  6. Trump criticizing the Fed
  7. The recent arrest of Huawei CFO and three Canadians in China
  8. The price of oil dropping to $43.
  9. Yield curve inversion
  10. Growin fears for an upcoming recession
  11. The dominance of electronic and algorithm trading
  12. Low trading volumes due to the holiday season

The combination of more negative news and low trading volumes created yet another perfect storm for what we observed in December 2018.

The asset classes performance

2018 will remain in history as the year when holding cash was the only profitable strategy.  Almost all major asset classes are in the red for 2018.

Future Outlook

As I mentioned earlier, all major macroeconomic factors are in a positive territory.

  • Highest corporate earnings growth since 2010
  • GDP growth over 3%
  • Record high consumer sentiment
  • End of year holiday shopping is expected to beat all records
  • Record low unemployment
  • Highest wage growth since 2008
  • Business activity remains high
  • Interest rates stay under historical levels
  • Low oil prices will temper inflation and business cost

Many economists believe that we are in the last leg of economic expansion. Moreover, some are even predicting a market recession in 2020. However, there is an old joke that the markets have predicted 9 out of the past 5 recessions. In spite the fact that equity markets are forward-looking, they have not been an accurate indicator for an economic recession.

Realistically speaking it would be very hard to enter recession from where we are today unless we see a very steep deterioration in 2019.

The law of mean reversion.

Everything reverts to the mean sooner or later. Last year we had one of the least volatile markets in our recent history. As a result, the S&P 500 standard deviation, a measure of risk, dropped to 3.8% well below average historical levels of 13%. This year’s market volatility is back to these average levels.

Diversify

In any market environment, volatile or not, diversification is essential way to reduce portfolio risk.

Think long term

The best long-term investment strategy has always been buy-and-hold. Trying to time the market is a bad idea. There are many studies that show timing the market would underperform a buy and hold strategy in the long run.

Don’t watch the market every day.

Media skews the news to what is trendy and get more readership.

Use your best judgement.

Panicking has never helped anyone. If you are uncertain seek advice from a fiduciary advisor who has your best interest in mind. 

About the author:

Stoyan Panayotov, CFA is the founder and CEO of Babylon Wealth Management, a fee-only investment advisory firm based in Walnut Creek, CA. Babylon Wealth Management offers personalized wealth management and financial planning services to individuals and families.  To learn more visit our Private Client Services page here. Additionally, we offer Outsourced Chief Investment Officer services to professional advisors (RIAs), family offices, endowments, defined benefit plans, and other institutional clients. To find out more visit our OCIO page here.

Disclaimer: Past performance does not guarantee future performance. Nothing in this article should be construed as a solicitation or offer, or recommendation, to buy or sell any security. The content of this article is a sole opinion of the author and Babylon Wealth Management. The opinion and information provided are only valid at the time of publishing this article. Investing in these asset classes may not be appropriate for your investment portfolio. If you decide to invest in any of the instruments discussed in the posting, you have to consider your risk tolerance, investment objectives, asset allocation, and overall financial situation. Different investors have different financial circumstances, and not all recommendations apply to everybody. Seek advice from your investment advisor before proceeding with any investment decisions. Various sources may provide different figures due to variations in methodology and timing,

About Stoyan Panayotov

I am a fee-only financial advisor and the founder of Babylon Wealth Management. As fiduciary advisors, we provide bespoke wealth management and personalized financial planning to busy families in the Bay Area and nationally. Many of our clients are tech workers, physicians, business owners, professionals preparing for retirement and young families looking to build financial independence.

I started Babylon Wealth Management to help young families and successful professionals build, grow and preserve their wealth. Being a fee-only financial advisor, I never earn sales commissions or sell investment products. Furthermore, I am committed to acting in my clients’ best interest by providing trusted advice and bespoke wealth management solutions. I enjoy helping clients develop robust and personalized long-term financial plans to achieve their personal and financial goals.

After completing a bachelor’s degree in Accounting at Varna University of Economics in Bulgaria, at the age of 23, I moved to New York City to pursue a Master of Business Administration at Pace University. I was fortunate enough to have a full merit-based scholarship and finished graduate school with no student loans. Upon completing grad school, I joined the ranks on Wall Street for nearly two years. I specialized in risk management and option strategies for equity and fixed income products for Deutsche Bank and Wells Fargo. In 2006 I obtained a highly recognized CFA designation.

Living in New York without family support was a life-changing experience for me. II arrived at JFK Airport on August 24, 2002. I stayed in a hostel for two weeks and later moved in with three of my fellow Bulgarian students into a one-bedroom apartment in the Bronx. There was a time in life when all I owned was $200, just enough to pay for the next month’s rent. Many times, I contemplated returning to Bulgaria, but somehow, I always pushed through life’s adversities. I’ve learned to appreciate each moment, big or small, that life presents. These challenges have helped me develop strength and flexibility, which supports my practice as a financial advisor.

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