By Steven Rogé, MBA, AIF®, CMFC®
Director of Research and Portfolio Management
Wednesday’s stock market drop of over 800 points (over 3%) on the Dow Jones Industrials Average surprised many investors. Comments from Federal Reserve Chairman Jerome Powell set in motion the rise in interest rates. Investors scrutinize every comment from the Chairman to glean insight as to how quickly and how long the Federal Reserve will be increasing interest rates.
The 10-year Treasury Bond, a proxy for interest rates, has been firmly above the 3% level and slowly climbing. While this has been anticipated by most investors for some time, occasionally the forecast for how quickly those rates will move up has had an impact on the markets. It is widely accepted that a slow and telegraphed increase in interest rates should be fine for the economy, and for banking institutions. However, when interest rates rise too fast, or even the anticipated increase in rates change, the stock market will reset values. In other words, we have a sell-off.
While sell-offs in the market can be upsetting they are actually healthy longer term. We haven’t had a meaningful correction to the stock market in about ten years. Keep in mind that the stock market is coming off all-time highs. We view any meaningful downturn in the stock market as a buying opportunity. Earnings growth of the S&P 500 is north of 20% and valuations are just slightly ahead of historical averages. We expect continued earnings growth which make stocks, based on next years earnings, very reasonable.
As for interest rates, we continue to expect a controlled and deliberate increase in rates. We have taken steps with our fixed income positions to lower bond duration which is an attempt to insulate our portfolios from the risk of rapidly rising interest rates. This includes the addition of floating rate bonds whose value will rise when interest rates go up.
While there may be some volatility from time-to-time like we saw yesterday, we believe that the Federal Reserve is not too “loco” as President Trump described it yesterday evening. This sell-off reminds us a lot of the one earlier this year in February. It started with interest rates, then it morphed into a European and Emerging Market crisis before investors focused back on the strong fundamental U.S. economy. Perhaps this time is different, and we wouldn’t rule that out, but this is why we always recommend a well-diversified portfolio to ride out these short-term volatilities in investments.
If you have any questions about your investments or financial plan, please feel free to give us a call.
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Steven Rogé, MBA, AIF®, CMFC® is Director of Research and Portfolio Manager of R. W. Rogé & Company, Inc. 603 Johnson Avenue, Suite 103, Bohemia, NY 11716. Phone: (631) 218-0077; Website: www.rwroge.com