Blog - Stratos Private Wealth

The US Stock Market Could Worsen

Written by Jeff Brown | November, 2018

 

Time to read: 6 minutes |

Smartest game plan: review the stock weightings in your portfolio.

  • While global stocks have been down since January, U.S. stocks dropped 10% or more in October.
  • As corrections can turn into steep drops (bear markets), consider reducing your stock allocation.
  • As investors retest the market, look for multiple big one-day gains and fewer stocks making new lows.

Election uncertainty, trade wars, and rising interest rates made for a recipe of investor concerns in October. After falling for 21 out of 27 sessions, the S&P dropped 9.9% or about 290 points to a low on October 29. The Dow Jones Industrial Average has fallen 2,385 points or 8.9% from its high. Losses in the Nasdaq Composite (-13%) and the small-cap Russell 2000 Index (-15%) have been steeper.

Investors should consider reducing stock allocation. With the global economy slowing and earnings growth decelerating, the stock market correction could continue and could be worse than the 2011 (-16.8%) and 2015-2016 (-14.5%) bear markets. According to Ned Davis Research, the average short-term bear market loss is -26%, using the Dow Jones Industrial Average back to 1901 (shown in the chart below). When stocks have been in a long-term uptrend (like they have been since March 2009), the average short-term bear market has fared slightly better, showing a loss of -19%. Therefore, it is prudent to review your portfolio stock weightings.

With the world interconnected, global stocks led the U.S. slide by eight months. Some international stock markets are down 20% or more, which is considered bear market territory.

After such severe losses, there is almost always a retest during which investors see if the market can stay above its prior low (2,641 for the S&P 500). A successful retest would include a smaller percentage of stocks making new lows. Multiple big one-day gains can also confirm a low is in place.

This week could spur a rally. Typically, the stock market notches its strongest gains following U.S. midterm elections. In fact, the fourth quarter of a midterm election year is the strongest (+7.5%) of all 16 quarters in a presidential cycle.

Bottom line: look for signs that the correction is over. In the meantime, review your stock weightings.

Stratos Private Wealth is a division through which Stratos Wealth Partners, Ltd. markets wealth management services. Investment advisory services offered through Stratos Wealth Partners, Ltd., a registered investment adviser.  Stratos Wealth Partners and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only; and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.  To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.  Investing involves risk including possible loss of principal. Some of the information contained herein has been obtained from third party sources which are reasonably believed to be reliable, but we cannot guarantee its accuracy or completeness. The information should not be regarded as a complete analysis of the subjects discussed.