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Correction or Crash?


** Market Update
------------------------------------------------------------

By definition a stock market correction is a 10% pull back from the 52 week high. Savvy investors realize corrections are a necessary part of the market cycle. (1) The stock market has been trending upward since the major downturn ending in 2009 and had accelerated since the Presidential election. In short, these rising markets create irrational exuberance that causes stock market prices to rise above their underlying value. Corrections occur as prices return to reasonable or lower valuations.

After this Friday's correction, the current P/E ratio is approximately 15 times earnings and the forward looking estimates reflect even lower P/E ratios. For that reason, we believe that equities are currently trading at a fair value and could be approaching more attractive valuations as we find a bottom. This morning, the GDP report reflected an annualized growth rate of 3.5%. This was on the heels of a 4.2% pace of growth for the previous quarter. We believe that a growth rate between 2% and 2.25% is a normalized rate for the U.S. economy, therefore these numbers remain very strong. (2) Personal consumption grew by 4%, which is better than the 3.8% that we saw last quarter. (2) This growth occurred with very little inflation, which increases the likelihood that the Federal Reserve may slow their pace of further interest rate hikes. Additionally, Goldman Sachs predicts that U.S. corporations will reach nearly one trillion dollars in stock buybacks for 2018, as well as, continue to
repatriate money held abroad due the beneficial corporate tax changes. This will likely increase corporate capital expenditures and contribute positively to the GDP in quarters to come. (3)

Headwinds include; the trade issues with China, rising interest rates, and uncertainty centered around the outcome of the upcoming elections. These factors are real and certainly contribute to the current volatility and raised emotions felt by investors. While we believe the majority of these issues are fully discounted into the markets current valuations, we will continue to monitor their developments and keep you abreast of potential changes.

In conclusion, the average stock market correction falls just short of 15% and we are currently more than two thirds of the way to that average number. (4) It is not our belief that we are experiencing a systemic breakdown as we did in 2008. As always feel free to reach out with any questions or to schedule a time to connect.

Thank you,
The Cardinal Team

Footnotes
1 .https://www.macrotrends.net/2577/sp-500-pe-ratio-price-to-earnings-chart
2 .https://www.bea.gov/
3 .https://www.cnbc.com/2018/08/06/companies-set-to-buy-back-1-trillion-worth-of-shares-this-year-to-kee.html
4. https://www.cnbc.com/2018/10/26/the-stock-market-loses-13percent-in-a-correction-on-average.html


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