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The Markets
Why did the stock market fall when the economy is doing well?

The answer is that one reflects the past and the other anticipates the future. 

Last Friday’s advance estimate from the Bureau of Economic Analysis showed the U.S. economy grew 3.5 percent during the third quarter of 2018. Harriet Torry of The Wall Street Journal reported:

“The economy powered ahead in the third quarter, driven by robust consumer and government spending, though Friday’s report included warning signs that the business sector faces turbulence that could hold back the expansion in the months ahead.”

Third quarter’s economic growth was slower than economic growth during the second quarter and stronger than economic growth during the first quarter of 2018.

Economists refer to economic growth as a ‘lagging indicator.’ It is a measure that may help confirm longer-term trends, but offers little information about the future.

In contrast, the stock market is a ‘leading indicator.’ It reflects what investors think may happen over the next few weeks or months. The volatility we’ve seen during the past two weeks suggests investors are uncertain about what may be ahead. Many factors are contributing to uncertainty. For instance, investors are concerned:

• The U.S. economy may grow more slowly. Economic growth slowed during the third quarter and investors are uncertain whether the trend will continue through the remainder of 2018 and into 2019.

• Negative earnings guidance from companies. Corporate earnings growth was robust during the third quarter. Through Friday, almost one-half of companies in the Standard and Poor’s 500 Index had reported earnings and their blended earnings growth rate was 22.5 percent, according to FactSet. However, despite strong earnings growth, many companies’ shares lost value. One reason is a fair number of companies have issued negative guidance indicating earnings may be weaker in the future.

• Trade tensions could slow global growth. While trade disputes with Mexico and Canada have been resolved, trade issues between the United States and China remain. Al Root of Barron’s reported:

“Now, on third-quarter calls, companies have begun to spell out tariff impacts in greater detail. Calculating the ultimate impact of tariffs isn’t easy or precise. A fair calculation would include not only costs but also changes in demand and the possibility of supply-chain disruptions. The result could be significant. The International Monetary Fund lowered its global growth expectations when it released its recent outlook because of, in part, ‘escalating trade tensions.’

• Federal Reserve rate hikes could slow economic growth too quickly. The Fed has begun raising the Fed funds rates, encouraging interest rates higher, in an effort to keep inflation in check. Some are concerned the Fed may raise rates too quickly or too high and choke economic growth.

You have probably heard the saying, “Markets hate uncertainty.” Recent volatility seems to be the result of uncertainty and it is possible uncertainty will cause stock markets to bounce around for some time. 

When stock markets are volatile and headlines describe the action with words like ‘plunge’ and ‘erase,’ it’s easy to let emotion get the better of you. Before making changes to your portfolio, please give us a call. We can discuss your concerns and any changes you would like to make to your long-term financial plan. 
Is That A Fact?  
A recent Pew Research Center survey found younger people (ages 18 to 49) were better able to distinguish facts from opinions than older people.

Jeffrey Gottfried at Pew reported, “About a third of 18- to 49-year-olds (32 percent) correctly identified all five of the factual statements as factual, compared with two-in-ten among those ages 50 and older. A similar pattern emerges for the opinion statements. Among 18- to 49-year-olds, 44 percent correctly identified all five opinion statements as opinions, compared with 26 percent among those ages 50 and older.”

Pew concluded younger Americans, especially millennials, were better able to distinguish fact from opinion than older Americans because young people tend to be more digitally savvy and also tend not to have a strong affiliation to either political party.

If you’re ready to test your acumen, visit the Pew Research Center website and search for ‘Quiz: How well can you tell factual from opinion statements?’

Weekly Focus – Think About It 
“I never considered a difference of opinion in politics, in religion, in philosophy, as cause for withdrawing from a friend.”
--Thomas Jefferson, 3rd American President
Market Update
 Dear Valued Investor:

The volatility that is often associated with the month of October has arrived with the market sell-off on Wednesday, October 10. Experiencing market declines and increased volatility can be unnerving for any investor, but if we can take a step back and see the big picture, that the market and economic environment remain positive, it can be easier to weather these challenging periods. 

During market ups and downs, it’s important to focus on the fundamentals. And right now, fundamentals are strong. The U.S. economy is in excellent shape. Consumer spending is growing solidly, consumer and business confidence is high, the job market is quite strong, manufacturing surveys are near record levels, and by historical standards, interest rates are still fairly low.

Of course, interest rates are dominating the headlines right now as a driving force in this current bout of market volatility. The positive economic backdrop, however, provides valuable context. When interest rates are rising because of better economic growth, stocks historically do well over tim e. [1] That appears to be the case now. When rates spike, as they have done recently, volatility picks up, and in LPL Research’s view, this spike was due to the recent positive economic data that have come in. Looking ahead, rates aren’t expected to continue on this strong trajectory.

With much of the increase in interest rates potentially behind us, that should enable stocks to settle down. Also, much like the economy, the stock market is seeing continued support, particularly from strong corporate profits. Consensus estimates according to FactSet are calling for a third consecutive quarter of 20%-plus growth in earnings for S&P 500 companies, thanks to strong economic growth, tax cuts, and minimal impact from tariffs. In addition, although uncertainty leading up to midterm elections can make investors uneasy, stocks historically do very well following the midterms once there is clarity from the results.

Trade tensions are another factor capturing investor attention. Despite tough rhetoric from both sides, we are likely to reach a trade deal with China after the midterms, as both sides have too much to lose economically. The amount of fiscal stimulus (through tax cuts and government spending) still far outweighs the tariffs that have been implemented or threatened.

Even with rising rates, trade tensions, and midterm election concerns, it’s also important to remember that pullbacks (5–10% drops) such as these are normal. Even though stocks tend to average a 7–8% gain each year, there tend to be about three pullbacks and at least one correction of 10% or more (data back to 1950). We experienced both earlier this year, in February and April, and we could have more before the end of the year. We are late in the business cycle, and although “late cycle” can last a long time, this period can mean there is greater short-term sensitivity from the markets. This context helps us avoid reacting too quickly.

I encourage you to stay calm during this latest bout of volatility and focus on the positive drivers that continue to support the markets and economy. Although the ups and downs may continue in the coming months, expectations for a potential year-end rally remain.

As always, please contact me with any questions you may have. 

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October Facts Edition - Did you know?
October 29th, 1929 - Known as "Black Tuesday," Wall Street Stock Market crashes triggering the "Great Depression."
* Securities offered through LPL Financial Member FINRA/SIPC.
* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer. 
You cannot invest directly in this index.
* The Standard & Poor's 500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Past performance does not guarantee future results.
* You cannot invest directly in an index.
* Consult your financial professional before making any investment decision.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Stock investing involves risk including loss of principal.
his information in not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
* The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basked of consumer goods and services.
* Harmonized Indexes of Consumer Prices are measures of consumer price inflation that have been standardized across multiple countries based on European Union definitions. A monthly report compiles HICP trends for 16 economies, alongside conventional Consumer Price Indexes (CPI) as measured by national governments.
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