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Analysis on Recent Market Sell Off - 10/11/18

Back in the February, we experienced a sell-off within the equity markets that caused panic among some investors. At the time, we noted that volatility in equity markets is here to stay. Yesterday, the Dow Jones, S&P 500, and NASDAQ all fell by more than 3% (the latter by more than 4%).

There are a few reasons why this may have happened and a couple of reasons why we at Atomi suggest it’s not reason to panic.

Why Did This Happen?

  1. Interest rates have gone up and will continue to do so. The Federal Reserve has raised rates three times this year, and despite the current market volatility, a fourth hike is expected this December. When interest rates go up, the borrowing costs for individuals and corporations alike go up as well. For example, the average rate on a 30-year mortgage just surpassed 5%.

  2. Trade relationships between the US and China is uncertain. We are at a point where the relationship could seesaw to either side - there could be a deal or there could be further escalation. As you know, there are few things markets hate more than uncertainty.

  3. Growth stocks have finally hit their limit, as evidenced by the NASDAQ’s slide. Goldman Sachs, based on their macro factor models, commented on yesterday’s selloff, “our best initial take is that yesterday’s repricing of US growth was an overdue gut-check following last week’s monetary and oil supply shocks… The severity of yesterday’s moves in the absence of catalysts strongly suggests that price declines were magnified by an unwind of crowded positions.”

Should We Make Any Changes?

Simply put, it’s wise to acknowledge that the changes taking place in the market are gradual, but significant. We could be seeing a shift from Growth to Value, for example. There has clearly been a cascade of negative news from emerging markets to currencies, Europe and now the US. It is also worth noting that corporate buybacks have been a cushion the market has been able to fall back on for at least the last 3 years. This correction is coming at a time when earnings are about to be reported and companies are in a “blackout” period, i.e. not allowed to repurchase shares.

We still believe that our current overall strategy is well-suited for the current environment. So, while this sell off feels a bit different from past ones, overall, the fundamental economic strength, earnings growth, amount of cash waiting to be deployed, strong consumer and business confidence, and historically low interest rates lead us to believe that stocks will find solid footing and move forward over our investable time horizon.

As always, feel free to contact us with any questions. We appreciate the trust and confidence you have with the Atomi team.

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