Fall Portfolio Pruning

Seasonal weakness in September/October doesn’t always happen, but we’re experiencing it now. Consider the following analogy: Normal and necessary to maintain a healthy yard. Think of it in three phases:

  1. Trimming a few branches here and there, pinching dead flowers, no big deal, right? That’s akin to stocks pulling back by around 5%.
  2. The newly trimmed hedge, now 6 inches shorter, is bare on top, and will need a few weeks to grow back leaves at the top to make it look nice again. That’s more like a 10-15% correction. Doesn’t look good at first, and needs some time to grow back.
  3. And then there are the roses. Ugly stumps by end of November…only to re-bloom by February (gotta love Southern California!). Or the large trees that need annual branch trimming. Like a bear market, down 20% or more, and will certainly need more time, maybe several months to recover. Each with varying degrees of yard care, all normal and prudent.

Same with your portfolios and the markets.  How low will this correction go? Dunno. At their recent lows, the major indices were 11–15% below their fall peaks. Definitely worse than weekly yard maintenance, yet clearly in correction levels (-10% in most indices). We are still not anticipating a bear market, or winter rose bush pruning, if you will, in the S&P 500 or Nasdaq indexes, and are monitoring carefully.

Dancing Through The Volatility

Previously, we blogged about possible seasonal weakness heading into September/October. The possible came to pass, with the stock market trading in an unsettled fashion. Volatility has been high as investors weigh the effects of rising interest rates, tariffs and potentially slowing global growth against the backdrop of corporate earnings season. Investors don’t like uncertainty, and the increased number of factors that could cause trouble has not gone over well on Wall Street.

The good news? The underlying economy remains strong. Wage growth is solid, though the pace of increase could be a concern (inflationary), which we’re watching. Corporate profits had a very good 3Q, with 80% of the publicly traded companies exceeding Q3 estimates.

The markets are trying to digest rising interest rates, and so far it’s been orderly—but we expect volatility to remain high over the next 18 months as interest rates normalize back to historical levels. Current fear gauges are also starting to show excessive levels—which is a contrarian good thing for the markets. So, fundamentally, these elements should help stocks in the coming months.

Finally, a word on politics.  As you know we typically stay away from political discussions, wading in if/when it relates directly to the markets and your accounts. Clients are asking us about the impact, if any, from the Supreme Court process, upcoming midterm elections and/or the White House. So far, little if any impact.

We use the following analogy: The markets are like a well-conditioned dancer who depends on strong legs (corporate profits) and a stable dance surface (the economy).  While the musical tune from one administration to another may change, merely affecting the dancer’s style, the markets should remain spry and upright as long as the economy and profits are stable and growing.

No matter your dance tune preference, we value your business, friendship and any questions and comments you have.

Contact us with any questions at 1-888-969-7500, info@silversageadvisors.com or via this form