October Review - Sumner Wealth Management

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- October 2018 -


Dear Visitor, 


October: Usually a SCARY month for Investors?


The stock market drop in October has been unsettling for anyone with investments, particularly after a 3 percent plunge Wednesday that wiped out the year’s gains. Could this be the beginning of a larger crash, or a recession?

Well sure, it could. But even before accounting for the moderate rebound in markets Thursday morning, it makes more sense to view this sell-off differently. This isn’t a crash, it’s a reset. The economy is shifting in ways that aren’t bullish for stock prices in the years ahead, but signal mostly good news for the economy and for ordinary people trying to make a living.

The bull market that will turn 10 years old early next year has, for most of its run, been a total dream for stock investors.

Economic growth in the United States has been steady, but growth worldwide has been slow — which has kept interest rates low, making stocks a more compelling investment than cash or bonds in comparison.

Weak growth and high unemployment meant companies faced little pressure to pay more for their inputs, including both labor and raw materials. If a worker demanded a raise or a supplier threatened a price increase, there were plenty of alternatives.

Late in this bull market, the Trump administration made its signature domestic policy initiative a steep cut in corporate tax rates, which flows through directly into higher after-tax profits for shareholders.

Those three factors together were enough to propel the Standard & Poor’s 500 up more than 300 percent from its March 2009 low to its recent high in September. But now, all three are shifting.

The economy is now heating up enough that interest rates are rising to more normal levels. Part of that is a result of Federal Reserve rate increases aimed at preventing the economy from overheating and from having excess inflation break out, a policy that President Trump has attacked.

But it’s not just the Fed. Even longer-term interest rates that the Fed does not directly control have risen substantially in the last year, as have longer-term rates in other countries. British, German and Japanese bond yields are all up over the same span.

If you look at the stock market only in terms of its valuation — how much you have to spend to buy shares for each dollar of corporate earnings you are capturing — the stock market drop in recent weeks can be explained in significant part by the rise in longer-term rates in the same period.

If you look at the price-earnings ratio of the S.&P. 500 stocks, for example, and invert it to view it as the earnings-to-price ratio, it was 4.77 percent on Sept 1, meaning buying $100 bought you $4.77 worth of corporate profits. After the stock drop, that had risen to 5.23 percent.

The jump closely parallels the rise in longer-term bond yields, which, again, are mostly driven by an improving growth outlook. The yield on 10-year Treasury bonds has risen to 3.13 percent from 2.85 percent in that same span.

Higher interest rates have made bonds more attractive, and it makes perfect sense that investors would demand a more favorable valuation from stocks given that alternative.

The story might be different if investors believed that higher growth would feed disproportionately into higher corporate profits. But the current economic moment offers plenty of reason to think it won’t.

Earlier in the expansion, there might have been lots of workers on the sidelines, and companies had leverage with their suppliers. But there are signs that is changing, like recent comments by 3M and Caterpillar that their input costs were rising, which helped kick off the recent bout of market weakness.

This is bad news for stocks and for the bottom lines of the largest companies, but good news for American workers. When you hear a phrase on a corporate call like “input costs are rising,” keep in mind that the wages you receive are one of those costs.

Finally, while the first big economic initiative of the Trump administration, the tax cuts, was an unquestionable boon for stocks, the focus this year has been on a trade war, especially with China.

So far, the scale of the tariffs hasn’t been big enough to have much impact on overall economic growth. But there has been a direct bottom-line impact for particular blue-chip companies that make goods using steel or aluminum (prices of which have spiked because of tariffs) or that import key parts from China.

As companies try to reroute supply chains or absorb higher costs to avoid raising prices on consumers, the trade war may have a much larger effect on the bottom lines of major industrial companies, and hence on their stock prices, than it does for ordinary consumers.

Put it together, and the stock market tumble of the last few weeks is not a mystery to be solved, nor a warning of horrible things to come, so much as an inevitable result of the economic expansion reaching a more mature stage.

The stock market looks at the future, not past performance — share prices are determined by what investors think the future looks like. And the economic future is starting to look quite different from the past.


About Sumner Wealth Management

Our firm assist individuals, families, and businesses in proactively preparing themselves for a broad range of financial decisions and life events by helping our clients gain income protection, financial stability, with a solid plan.  We are an integrated, Wealth Manager Specialists. 

Mark Sumner
Financial Advisor


Sumner Wealth Management, Inc.          
142 South Cardigan Way, Suite D                                                                                                                                      
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Mooresville, NC  28117                      
Direct (704) 905 - 3594                                         

Investment Management
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   Sumner Wealth Management | 704.905.3594 | www.SumnerWealthManagement.com

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