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Special Comments on Recent Markets

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Monday, October 1, 2018

Terry L. Blaker, SrVP and Director, Investment & Portfolio Management

If you are a stock investor, the last few days of market declines may rattle your confidence. Stock declines remind all of us that risk has both an upside and downside. This very long bull market in stocks coupled with historically low interest rates have lulled some investors into taking more risk (i.e. allocating more to stocks) than what is prudent for their personal situation. However, if you have a well-thought out, long term plan for your investment portfolio, our advice remains to not panic or deviate from your plan. However, if you haven’t carefully assessed your risk tolerance, now is the time to do so, preferably with a trusted investment professional like our team at First Merchants.

So what is causing the slide in prices? Major stock indexes have dropped more than 5% in the last two days, sending the market to three-month lows. If you have followed the markets closely in the last few months, you have noticed a high degree of variance in performance by sector. Part of the recent declines are simply driven by high-flying stocks falling back to more realistic prices. Volatility has increased as interest rates have jumped in response to healthy economic data. Additional fuel to the volatility has been provided by Federal Reserve officials suggesting our central bank might be comfortable with further interest rate increases, exceeding what many market observers forecasted just a few months ago.

Additional reasons for the sell-off include:

  1. Concerns about a slowdown in global growth partially due to tariff and trade controversies,
  2. Fears that higher interest rates will both slow economic growth and cause allocation shifts from stocks to bonds,
  3. Upcoming mid-term elections, and
  4. A possible slowdown in the robust corporate earnings growth of the last several quarters which were partly driven by tax cuts

These reasons should not be a surprise to anyone, but investors with short attention spans have refocused on them and have decided to, at least temporarily, “de-risk” their portfolios. As it did with the market drop in late January and early February, this has caused additional investors to panic and make imprudent, short-term and emotional decisions.

While we do not know what stocks may do in the near future, we do believe the recent slide in stock prices will be contained and is not a sign of a near-term bear market or economic recession. While the U.S. has resolved trade concerns with some of our trading partners, negotiations with China have the potential to keep tensions in the news for some time. Additionally, higher interest rates will provide a headwind to both economic and corporate earnings growth and mid-term elections may temporarily rattle the market.

However, we believe the current bull market and economic recovery will continue, supported by solid economic fundamentals, historically reasonable interest rates, strong consumer sentiment and unemployment at near record levels.

Thank you for the trust you place in our team and choosing us as your partner in your pursuit.

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Investment Management solutions provided by First Merchants Private Wealth Advisors may not be FDIC insured, are not deposits of First Merchants Bank, and may lose value. Investments are not guaranteed by First Merchants Bank and are not insured by any government agency.  This material has been prepared solely for informational purposes. First Merchants shall not be liable for any errors or delays in the data or information, or for any actions taken in reliance thereon. Any views or opinions in this message are solely those of the author and do not necessarily represent those of the organization.