The month of October was a scary one for the stock market. From its September 20^th peak, the S&P 500 fell as much as 10% before rallying in the last few days of the month to close down 7%. The majority of the headlines pointed to investor concerns over trade and higher interest rates. We have not experienced market volatility like this since February, when hints of rising inflation and the first discussion of tariffs caused a similar 10% decline. But is this latest downturn the beginning of a bear market? No, not yet.

We do not see signs of an economic downturn. We are just over halfway through earnings season, with over 80% of S&P companies posting earnings results that exceeded expectations. The labor market remains strong with no indications of slowing. In fact, job growth has accelerated since this time last year. Today’s jobs report revealed that the U.S. added 250,000 jobs in the month of October, much higher than the 200,000 that economists had predicted. Hourly wage growth improved, putting the U.S. consumer in even better shape. The U.S. economy will also benefit from large amounts of fiscal stimulus provided by the Trump administration.

Tariffs have increased costs for many U.S. companies, but most say they plan to pass those costs on to consumers in the form of higher prices. This trend, along with a tight labor market, points to higher inflation.

Higher prices should lead to higher interest rates, as the Federal Reserve attempts to curtail inflation before it runs out of control. At a 10-year yield of just over 3%, rates have not yet reached a point where they will hamper economic growth. We continue to monitor signs of overtightening by the Federal Reserve which is what we ultimately believe will end this bull market cycle.

The market decline and earnings growth have made valuations more attractive, with the price-to-earnings ratio of the S&P falling from 18x to about 16.5x, right in line with the 25-year average P/E ratio. Our most recent quarterly commentary and our fall presentation explained that we are “Preparing to Pivot.” Although we have made slight adjustments to our portfolios, we are not pivoting at this moment. We remain focused on monitoring economic indicators without being swayed by the emotional swings of stock market volatility. When it is time, we will pivot in stock selection first, by tilting toward more value-oriented stocks. Later in the cycle, we will pivot in asset allocation, by decreasing our equity exposure and allocating to fixed income.

Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Roberts Investment Advisors, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.