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We view this selloff as a short term pullback and not the beginning of a new bear market. The fundamentals of the economy remain strong with positive GDP growth and low unemployment. The recent tax reforms have not fully taken effect yet, which we believe will result in strong earnings growth (10+%) for US Large Cap companies. Interest rates, while on the rise, are still historically very accommodative.
The selling within the equity markets has been quite uniform across the board with most sectors being down 3-5%. Additionally safe haven investments such as Gold and US Treasuries have been in positive territory. There may be further short term weakness due to forced margin selling, program trading, and other technical issues, but we feel that given the rapid spike in volatility indicators (VIX at 37), we are closer to the end of this pullback.
Let us remember that 2017 was an extraordinary year for equity market returns. Periodic stock market pullbacks are normal occurrences, which is why we focus our clients on their overall asset allocation. During these times, high-quality fixed income as well as other non-traditional asset classes can act as important diversifiers in portfolios, often holding value during sharp drops in equity prices.
Finally, the media can be a powerful force during times like these. Headlines such as "Biggest Drop Ever for the Dow" are more journalistic sensationalism then what is rooted in reality. It is important to maintain a calm demeanor, focus on percentages rather than absolute numbers, and remember investing is a long term endeavor. As long as our positive fundamental thesis regarding the global economy remains intact, our optimistic outlook remains in place.