CORRECTION OR BEAR?
At this writing, the U.S. has experienced an equity sell-off that has the S&P 500 slightly over 13% off its February 19, 2020 high. Meanwhile, US Treasury bonds have reached all-time high prices, with the 10-year Treasury bond having increased by over 4.6% over the same period. The catalyst for these moves has been increasing fear of the coronavirus becoming a pandemic that could lead to a global economic slowdown. The question becomes: is this a correction, or the beginning of a bear market?
A correction is defined as a decline of 10% or more and is usually a result of valuations being stretched.
A bear market is defined as a decline of 20% or more and usually signals a coming economic slowdown.
Putting this sell-off in context, the S&P 500 moved up 19% in under six months through February 20, 2020 - an amazing move that led to forward-looking price-to-earnings (PE) ratios of near 19 times earnings (meaning investors would pay 19 dollars for 1 dollar of earnings in S&P 500 companies). This compares to a 25-year average of only 16.28 times earnings. With this drop, forward-looking PE ratios have adjusted to about 16.5 times – much closer to historical averages. In short, stock values were stretched, and a correction was due.
Additionally, the economy remains resilient with economic growth coming in at 2.1% for Q4, 2019 and projected economic growth of 2% for 2020. As a result, we currently view this as a correction and not the beginnings of a bear market.
Those of you who entrust BOULEVARD with managing assets know that we are highly conscious of risk management, both in how we position assets relative to financial goals, and in our focus on quality holdings, which tend to hold more value during these downturns, versus just returns. You may also know we consider these market changes an opportunity to rebalance portfolios – taking gains from fixed income wherever possible, and moving into equity holdings at a discount wherever possible – after we get an indication that the current trend is reversing.
For current clients, we are grateful for the opportunity to serve your family and appreciate the trust you have placed in us. For others, please let us know how we can assist your family in meeting its financial goals.
If you have any questions or concerns, please don’t hesitate to connect with us at: www.boulevardwealth.com, call (877) 664-2583, or schedule at: www.calendly.com/troynoor or www.calendly.com/aaronkolkman.
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Advisory Services through Boulevard Wealth Management, Inc. (dba BOULEVARD), a Registered Investment Advisor. Information provided has been prepared from sources believed to be reliable but is not guaranteed and does not represent all available data necessary for making financial decisions and is for informational purposes only. BOULEVARD and its representatives do not offer tax or legal advice through BOULEVARD. Please consult the appropriate advisor.