Markets hit another rough patch, but not all sectors feel the same pain

Mike Loewengart, Vice President of Investment Strategy

E*TRADE Capital Management

10/25/18

After several days of equity market declines, we’re now seeing the largest losses for a single month since February 2009, which was arguably the depths of the financial crisis. Simple messages to stay the course may offer little consolation at times like these, so we want to take this opportunity to add some color to remarks shared earlier in the week encouraging investors to look past recent bouts of volatility and remain focused on long-term goals.

Sectors, company fundamentals are taking on greater importance

First, it’s important to note that the decline in equities is not uniform across all sectors. Tech stocks and other “growth-oriented” sectors are pulling back more than traditional defensive sectors like consumer staples, telecom, and utilities. To put this in perspective, consider the strong multi-year run that growth stocks have had. After leading the market during a relatively accommodative monetary environment, it’s not surprising to see growth stocks pull back given escalating borrowing costs (which have risen in response to robust economic growth). 

For some time now, investors have gravitated towards broad-based passive investments, which outperformed strategies that focused on more specific segments of the markets. As tighter monetary conditions emerge, however, we may be moving towards an environment in which company-specific fundamentals receive greater emphasis. Given this backdrop, the most fundamentally sound and least leveraged companies may be well-positioned to weather more trying market conditions.

High-quality bonds can serve as an important refuge

Second, although interest rates are rising, bonds have risen over the last several days as investment-grade bonds can be viewed as a haven during volatile times. Over the last several days, a fixed income allocation has helped to provide ballast to a balanced, diversified portfolio.

Good chance to reassess portfolio risk profile

Third, if this week in the equity markets has unnerved you, take this opportunity to assess just how much risk you’re comfortable assuming. If recent declines have you contemplating timing the markets, think again, as doing so is difficult, if not impossible. Unsuccessful attempts to time the market can also make it more difficult to compound investment returns over long periods. A more practical solution is to figure out how much risk you can live with—even during market volatility—without making major changes to your portfolio.

We talk a lot about diversification, and volatile stretches like this underscore why. No one can predict the direction of the markets, but we believe that well-diversified investors are well-positioned to weather bumps in the road while working towards their long-term financial goals.

Thanks for reading,

Mike Loewengart

Vice President, Investment Strategy

E*TRADE Capital Management, LLC

Mike Loewengart is the Vice President of Investment Strategy for E*TRADE Capital Management, LLC. Mike is responsible for the asset allocation and investment vehicle selections used in E*TRADE’s advisory platforms. Prior to joining E*TRADE in 2007, Mike was the Director of Investment Management for a large multinational asset management company, where he oversaw corporate pension plan assets. Early in his career, Mike was a research analyst focusing on investment manager due diligence for the consulting divisions of several high-profile investment firms. Mike holds series 7, 24, and 66 designations, as well as the Chartered Alternative Investment Analyst (CAIA) designation. He is a graduate of Middlebury College with a degree in economics.