Capital Markets Update

Current market conditions are repricing asset classes around an upward shifting inflation expectation and  steepening yield curve.  At the same time, there is fear around Federal Reserve Policy resulting in over tightening.

Our research supports the view that the US is still mid cycle with strong momentum going into 2019.  The labor market has room to improve and inflationary pressure is not supporting signs of overheat conditions.

Looking Forward

Economic fundaments for the remaining of 2018 and 2019 still look positive.

-All of our internal momentum indicators remain constructive.
-Actual inflation in the US remain low and Fed Policy remains accommodative.
-S&P 500 3rd quarter earnings season has started with over 60% of companies reporting a full standard deviation beat relative to analyst expectations.
-Full year 2019 revenue continues to be revised up.

-Our bottom up 12 month forward S&P 500 valuation target has been revised up since last quarter.

How Long Do Market Corrections Last?

With US stocks entering correction territory, there is much discussion about both the normalcy of notable pullbacks and what may be next.

BofA Merrill Lynch pointed out this week that 5%+ pullbacks have occurred three times per year on average since 1930, the last of which occurred in June 2016. In addition, 10% corrections have occurred one time per year on average, most recently in Q1 2016, while 15% pullbacks have occurred once every two years, most recently in August 2011.

Goldman Sachs pointed out that downturns within bull markets of 10% or more are not uncommon. It noted the average bull market correction is 13% and takes just four months to recover (CNBC).

Bloomberg discussed how there have been nine times since the bull market began in 2009 that equities have experienced drawdowns as severe as the current malaise and each time, the market has rebounded.

Bespoke Investment Group looked at the most rapid market drawdowns (the current nine-day drawdown to a 10% decline is the fastest such occurrence since at least 1980). It noted that the S&P typically bottomed out at around an 11% decline with a median 7.5% worst-case close.