Iron Capital Insights

  • Iron Capital Insights
  • October 24, 2018
  • Chuck Osborne

Boo! October Can Be Scary

My kids just watched the Charlie Brown Halloween special, fall weather has finally arrived in Atlanta, and our front porch is full of various types of pumpkins. It is October.

So, why is the market selling off? It is October, what other reason do we need? As we said when this selloff began, this is a buying opportunity for long-term investors, and buying is pretty much what we have been doing. Slowly and carefully, but we are still positive because companies are for the most part doing well, and companies are the things in which we invest.

Of course, the talking heads have to have something to say, so they will search for reasons. Tensions with China, rising interest rates, the eventual end of our economic expansion – the news has mentioned all of these things, so let’s address them.

China does have real problems. Are they being caused by Trump’s policies? He will take credit, I am sure, but the truth is that it is impossible to know. What we do know is that their growth rate is slowing. Their stock market is down dramatically and they have currency problems as well. Is this impacting our markets? Perhaps, but thus far it has not actually impacted American companies. Earnings reports remain strong, and guidance for future earnings has remained strong. We invest in companies, not markets, so it appears we are good here.

Interest rates spiked suddenly and everyone began talking about them; this is what is causing the downturn. At least that is what many have said. The problem with this theory is that rising interest rates at this point in the economic cycle indicate better growth. It means people are more optimistic about the future and therefore demand a higher return on their money if they are to loan it to anyone. It also stopped; after the one-week spike, interest rates have leveled off. This does not seem a likely deterrent to company earnings unless a particular company has too much debt. That is easily avoided by us or the mutual fund managers we may use.

We are in year nine of our economic expansion and we have to be coming to the end, right? Wrong. It is true that the average economic cycle going back many years is approximately five years. The cycle means we have a recession (which is defined as at least two quarters in a row of negative economic growth), then we have a recovery. After the recovery, we expand and eventually have another recession. We cycle. Nine years is a long cycle; however, there is no evidence that cycles know what time it is or have a stopwatch. Cycles vary; some are short, some are long, and five years is an average. Cycles have also been getting longer. The other factor to consider is that this positive cycle started and for many years remained much slower than normal. Several years into the expansion, polls still indicated that people thought we were in a recession. I know there is a textbook definition, but perhaps one could argue that if most people think it feels like a recession, then it probably is a recession. If we look at the world that way, then this expansion is much younger than the experts claim. We have to be mindful of the data and willing to accept what it is telling us, but at this point there is no sign of recession ahead.

So, what is the reason? In the immortal words of Mr. Gibbs from “Pirates of the Caribbean,” “reason’s got nothin’ to do with it.” Prudent investors see market behavior like this as an opportunity. It isn’t that scary in October – it’s trick or treat time!

Warm regards,

Chuck Osborne, CFA

Managing Director