It has been a difficult week for global stock prices. Market indexes declined more than 6% with some sectors and individual stocks falling even further. At this point, market indexes are approximately 8% off their all-time highs and still within the range of a normal correction (8-10%). However, the speed and breadth of this decline should cause investors to re-examine overall market fundamentals, sector exposure and to once again question the longevity of the bull market.

When stock prices fall abruptly, it can awaken even the most carefree, long-term investor. However, market declines and volatility must be kept in perspective to prevent reactive, poor decision making, as well as to keep one’s sanity! During this bull market, we have experienced nearly 20 corrections of more than 7%, which should provide some comfort to those who think the sky might be falling. The average correction during bull markets is 8-10% – so we remain within normal range. The fact that most of this correction has occurred within one week is unusual and begs attention. In addition, though indexes are within normal correction territory, some sectors have fallen further than normal, which may be a warning sign of what is to come.

In our last Strategy Update, we discussed how the market’s performance was increasingly bifurcated – most sectors performing fine – but energy and material stocks performing terribly. Fortunately, we sold these sectors long before their very significant decline. Recently, we see weakness beyond normal in other sectors and sub-sectors beyond oil and material stocks. This includes a number of economically sensitive stocks including autos, financials and semiconductors – which we also recently sold. Is the market telling us that the global economy may be tilting toward recession and bear market? Perhaps. However, if one carefully reviews the evidence – which our team does regularly and with enthusiasm – it is hard to make a case for the end of this cycle. Stock prices are not at overvalued levels, 74% of companies have reported better than expected earnings this quarter, and though global growth continues to be slow, it has not stalled. Is this recent pullback what we call “the pause that refreshes” or the beginning of something worse?

To some extent, we as investors are always dealing with the unknown and the somewhat unpredictable, which is why at Main Street we use tools to prepare us for what we cannot predict. This includes your allocation to stocks (which has recently been reduced by selling), the careful management of your sector exposure to avoid poorly performing industries (energy and materials) and our use of stop loss orders to mitigate catastrophic loss. Though none of these tools are perfect, they have served us very well in both up and down markets. It is with our process in mind that we can sanely manage with the unknown, fully understanding that if this is the beginning of a bear market, our process will remove exposure before it is way too late. Will we give up some profits here and there? Sure. But will we mitigate the big decline which most of Wall Street and Robo-advice is likely to experience? Most likely.

All of us hope you enjoy your weekend. Try not to spend it obsessing about the next direction of the stock market – we will be busy doing that for you! It appears that it is too early for the beginning of the end of the cycle – so hopefully the market and investors will find some footing next week and equity prices will begin their recovery

As always, if you have any questions for us or have experienced a change in your financial circumstances, please let us know.

Sincerely,

Your Team at Main Street Research