What’s With the Market?
Market volatility has recently came back to life after spending a little over a year in hibernation. Equity markets were very rewarding for investors in 2017 and these rewards came about without so much as a 5% pullback. It seemed that stocks moved in only one direction- Up! January 2018 started was an even more impressive follow-on of the march to new high after new high. People were starting to talk about investing again after a decade of fear kept and cautiousness. President Trump was tweeting regularly about the strong stock market. But hold on…just as the mood was getting good Mr. Market slaps us with a surprise punch in the face. It seems everyone understands and accepts that markets have corrections-until they actually occur. “What’s wrong”? “What should we do?” “I knew I should have kept my money in the bank”. These are all common questions or feelings when we see stock values drop.
The media has a field day with events like these. They create big bold headlines about Plunges, Routs, Panics and Crashes. “The biggest sell off in market history” they say. They fail to point out that the percentage point drop we saw on February 5th doesn’t even make the top 100 in the list of daily declines. They trot out the ‘experts’ to give us their advice and opinions on market movements. Most of which are hand selected to generate the most amount of viewers (read- the predictions that create fear and worry). It literally makes me laugh listening to these talking heads and their lame attempts to pin- point actual causes of daily market movements, what they mean and what to do about them. They give blanket statements as if they have the correct answer for everyone. In reality, most of the volatility in our day is caused by computer generated trading models. Millions of shares of stock are traded in a matter of seconds as these computer programs attempt to take advantage of a single penny of price movement. Then another round of trading occurs seconds later as other programs see a new ‘trend’, forcing prices down as more sell orders are placed than buy orders. But even setting these trading programs aside, we were overdue for a correction. Since we are now trading north of $20,000 on the DOW, a run of the mill 10% correction requires greater than a 2000 point drop. We have to keep things in perspective.
The S&P 500 has averaged about two corrections of 10% or more every year. We just haven’t had one in quite a long time. We needed a correction to equalize some market forces and stabilize the foundation for a continued upward trend. We advise not becoming a trader just because markets get silly temporarily. Investors are much different than traders. Investors appreciate budgeting and planning and understand that being a shareholder in a business is a long term endeavor. They prefer to stay put when values fluctuate or buy more shares when prices get attractive. Traders don’t care a bit about a business’s long term outlook nor do they care about market truisms like ‘buy low’ and ‘sell high’. They only concern themselves with flipping shares as if they were cards in a game of slap jack. They don’t care if Apple continues to invent new products and increase shareholder earnings year after year. We prefer to take the investor approach. Own, don’t rent companies.
What should you do during a market correction?
- Consider if you are properly diversified and following a pre-determined risk tolerance. This means that you didn’t allow your investments to drift way outside of your normal comfort zone during the big upswing now to find that you are totally uncomfortable with the down swing. If your risk tolerance calls for a balanced strategy, stick with that strategy and possibly rebalance your portfolio during big swings in either direction. By definition this will trigger buying assets that are currently low and selling others that are currently high. Rebalance regularly- say, once or twice per year.
- If at all possible, add to your portfolio either by increasing the amount you are deferring into your 401k or by manually buying more of select investments that are now cheaper. The old Buffett saying applies so well, ‘Get greedy when everyone else is fearful’.
- Perhaps most importantly, don’t do anything drastic. Deciding to sell all of your investments to ‘wait for the dust to settle’ is a no-no. Even if your really smart friend from work told you to do so. Making a large scale overhaul to your investment holdings or strategy during a market down turn would be considered an emotional decision. Emotions don’t assist us well when it comes to successful investing.
We believe that the U.S. economy is positioned well for continued growth and expansion. Corporate earnings are in great shape, employment is at record levels and housing is robust. Tax rates have been reduced for most Americans and business spending is increasing rapidly. The wild card now becomes inflation and the plan to deal with our mounting United States government debt. How quickly will the Federal Reserve have to raise rates to combat inflation? We have been predicting inflationary pressure for some time now and took action by adding commodities to most of our model portfolios as well as reducing bond duration in our fixed income sleeve. What actions will our trusty politicians implement to deal with our national debt and turn back unnecessary and impractical spending? These are the main threats to our economic expansion but aren’t imminent threats just yet. We expect markets to perform fairly well in 2018 though not on the magnitude of 2017. Global meltdown? Not the way we see it. Maybe stocks correct for a short time period. However, we think the headline at year end will read ‘Global expansion continues’.
Billy C. Peterson, CFP, CDFA
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Billy Peterson and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.