The markets have presented an opportunity for me to reach out and say Happy Holidays! Volatility is back – and with a vengeance. The question has been raised a few times, “Is this where we get out of the market?” I can confidently say that it is not.

Don’t take that as me knowing exactly where things go from here, because nobody does. This is an opportunity to reflect on your long-term approach and, more importantly, your overall tolerance for risk. We are likely experiencing your “garden variety” correction, which starts at a decline of about 10%. Bear market territory begins at -20% and right now small-cap stocks are getting close to that level, but the NASDAQ and S&P 500 are nowhere near that level. Small caps have led the most recent rally; they have increased the most and naturally would fall the most during a decline. Let’s take a look at reasons that suggest this current decline may be a bit overdone.

There has been some healthy debate over the “R” word lately. Recession. Yuck. Fortunately, the chances of a true recession anytime soon are relatively low. Technically, a recession requires two consecutive quarters of negative GDP growth. The last GDP print was around 3%. Obviously, the earliest possible opportunity for a recession would be 3rd quarter of 2019, and the odds of going from a 3% GDP rate in the 4th quarter of this year to a negative quarter to begin next year are nearly zero. So that pushes any chance of a recession into the 4th quarter of next year – and even that is a remote possibility. Of course, there are always “black swan” types of events that can occur, such as an unexpected military conflict or significant terror attack, a devastating natural disaster, or some monster political story that catches us all off guard. Barring such events, we don’t see a recession anywhere in the near future.

Some reasons to be a bit more optimistic. The “trade war” with China isn’t really a war. It would be like me picking a fight with Mike Tyson. That would not end well for me. And if Mike Tyson picked a fight with me, I may do my best to put up a front so that I don’t look like a wimp, but in the end, you can rest assured I will gracefully bow out and concede defeat. China can’t win a trade war with the U.S. right now. Maybe someday in the distant future, but not today. They need our money and our food. Without those two items, China will take a Tyson-style knockout punch. If you think our stock market has had a rough run, look at the Hang Seng. It’s down nearly 25% from it’s high earlier this year. I believe we will get a trade deal in 2019 and will finally be able to put an end to this chapter.

The Fed is set to meet this week. By the time you read this, the meeting will likely have taken place. The consensus view suggests we get another rate hike. More important than the hike will be the commentary that comes with it. The Fed has some decent reasons to raise, but also to take a less hawkish stance going forward. If we get something along those lines, it could be well received by the market. I don’t think all this volatility immediately preceding this meeting is a coincidence. The markets are speaking loudly that they would prefer the Fed not over-correct this time and raise rates faster and farther than they need to. We will see if anyone at the Fed is listening.

And lastly, it should be noted that the third year of the presidential term has historically been the best performing year in the equity markets. The economic data largely supports this. Tax rates are historically low, interest rates are still historically low. Corporate profits are still growing by over 15%. Inflation is still benign, and unemployment is at an all-time low. The real estate market is in good shape, banks are well capitalized and rising rates tends to help both banks and insurance companies. When you add it all up, it’s hard to make a longer-term bearish case. Again, only time will tell.

Back to you. If this recent decline has caused you some indigestion, it probably means that your current portfolio may not be aligned with your actual risk tolerance. Tolerance for risk is never determined while the market is rising. It is always tested and forged during times of duress. The smart play would be to let this current market drop work itself out. If, as we think and hope it might, the market recovers from here and starts another leg up, during that rise would be a very good opportunity to take some chips off the table. I’ve already had this chat with many of you and will continue to do so as we move into 2019.

We would like to take this opportunity to thank you for your continued trust and confidence. And I am extremely excited about 2019 from a business point of view. We have lots planned and I think you will like the initiatives we are working on. I am incredibly thankful that I’ve had the opportunity to be your trusted advisor and am more committed than ever to taking our company to the next level. We wish you and your family the best of the Holiday Season; take the time to enjoy, as each year the season goes by just a little faster. Personally, I am looking forward to spending some quality time with my punks – they’re all so grown up now, I’m not sure how that happened!

Best regards,
Terry Sawchuk
Founder & Chairman

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