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October 2018 Investment Strategy and Market Update

Investment Strategy & Market Update - October 2018


After hitting an all-time high in September 2018, the U.S. stock market, as represented by the S&P 500 Index, has declined more than 6%. In addition, many areas of the bond market have experienced selling pressure. Higher rates and trade war fears are behind the profit-taking thus far in October. The commentary below represents our thoughts on the recent market moves, as we look to the second half of what has certainly been a volatile month.


Longest Bull Market in History

During the summer of 2018, the U.S. stock market achieved a significant milestone, namely, the all-time longest bull market on record.  Incredibly enough, it has been more than 9 years since we have experienced a 20% or greater market downturn.  As many of you may recall, the financial crisis of 2008-2009 was the last time stocks sold off to such a degree.  We are far from reaching a 20% decline from the all-time high set last month, but instinctively, know it will come one day.


Volatility may continue should rates rise as expected into 2019.  As such, we are advising clients to anticipate several episodes like this latest drawdown over the next 18 months.  These sell-offs will be unpredictable, without warning, and will most certainly cause anxiety for stock and bond investors who are not used to experiencing such volatility in their accounts.  As always, we will make the necessary adjustments in your portfolio to best manage these risks, given your financial goals and tolerance for price movements.   


Despite this additional volatility there is good reason to believe stocks will remain in an upward trajectory for the time-being.  Earnings are at all-time high levels, boosted by an economy that continues to surprise on the upside.  Full employment and record revenues build company confidence in long-established and new capital spending plans.  Additionally, lending rates remain at extremely attractive levels despite their recent climb.  Some ongoing expectation of slower growth momentum is prudent.  However, we do not expect rates at these levels to cause significant economic slowdown over the next 18 months.


For long-term investors, these drawdown periods can represent some of the best buying opportunities.  You may recall our investment process requires strong economic and corporate fundamentals in order to justify increasing stock market risk for clients.  We do not believe now is the correct time to act in this regard.  However, should the investment markets continue to decline into the winter, the opportunity to do so may be deemed more attractive.  We will keep you updated as to our current opinion regarding any continued market correction.


Bond Investments Demand Flexibility

As we have warned for some time, the expected rise in rates has resulted in falling bond prices and some general selling pressure. Our current bond investments have been positioned to mitigate losses during a broad-based increase in interest rates. So far in 2018, our strategy has worked to preserve our clients' fixed income investment value in a very difficult environment for rate-sensitive instruments. Over the coming days you may see further portfolio changes in your account to emphasize our opinion rates will likely rise in 2019. We will be increasing the number of floating rate bond holdings in accounts, where appropriate, in order to limit the downside of future rate hikes and participate in higher interest rates in the future. We will also begin to take profits in some of our preferred stock and mortgage-related investments. Preferred stocks and mortgage bonds have served us well for many years, however our investment process is focused on what lies ahead rather than past performance.



Over the last few years we have seen the benefits of our investment philosophy, process and principles pay dividends time and time again. We are so thankful for the opportunity to serve our clients in a personalized capacity. Moving forward in an environment where risks may be elevated demands flexibility, patience and objectivity. If you have any questions regarding the above, please feel free to contact your financial advisor. We sincerely thank you for your continued trust in our team.


Doug Blanton, CFA®

Chief Investment Officer, Merit Financial Advisors

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Check the background of this financial professional on FINRA's BrokerCheck