Most recently you heard from me celebrating the 10-year anniversary of the firm. Those of you that honored me with your trust at the time, recall that it was a very distressing time in the market. I shared emails such as these every few days as we navigated devastating markets through great uncertainty.
You may be worrying that our 10th celebration is ironically coinciding with similarly disruptive markets. While the volatility of the past few weeks has been uncomfortable, I don’t have the same worries so far. In 2008, even as an experienced investment professional of 20 years, my colleagues and I were navigating unknown territory. Our entire financial system went to the brink of collapse.
Today, there are no signs of structural fragility in our financial system. There are no major institutions unable to meet overnight obligations and there are no widespread mortgage defaults. In fact, corporate and household debt are still at much lower levels than 10 years ago, even as we might debate the recent increase in lower quality mortgage underwriting again. In short, the U.S. economy is quite stable.
The current market action does not at all remind me of 2008, but it does seem to have similarities to the late 1990s and 2000. Through September 30, I shared that the market strength was highly concentrated in the Technology sector and almost half of the S&P 500 was not participating. This very narrow leadership is reminiscent of the momentum markets we saw in the late 90s. The dot.com bust and correction were painful, especially for those who owned portfolios full of new internet stocks. Those with fully diversified portfolios, fared better and recovered quickly from the market correction.
Today’s high-flying stocks are different in that most of them are companies with real businesses and real earnings. Still, stocks such as Amazon, Facebook and Nvidia – to name a few- have been trading at extreme valuations compared to the rest of the market. It is not unusual to see them correct. Other areas of the market such as Consumer Staples and Health Care are still reasonably valued, and investors are returning to the quality of these investments.
It is not clear what particular influence set off the current volatility and correction. It is easy to say that rising interest rates are the culprit, but the Federal Reserve has been completely transparent for months with their plans to raise interest rates. We have included these projections into our valuations and investments plans all along, as have most professional investors.
So far, we maintain our view that the markets will be higher at year-end and this is a correction of excess valuations, particularly in certain sectors and stocks. As has been our goal, our portfolios are protecting capital on the downside better than the overall market. We do not know yet where this volatility will lead, and we are assessing risk and opportunities daily to assure that portfolios reflects our best thinking.