A Brief Thought on “Market Timing”

Recently I was reminded by one of my most respected CFP® friends of a quote by Warren Buffet regarding investors overreacting during market corrections.  Karl has a “knack” of giving sound, time-tested financial advice in a very crystal clear way his clients and others appreciate.  Hopefully this will shed light on why investment advisors throughout the country encourage clients to avoid getting drawn into market timing and trying to “run for exit the doors” when markets correct.

The Market is the most efficient mechanism anywhere in the world for transferring wealth from inpatient people to patient people.” – Warren Buffet

 

Market Update & Perspectives

After days like these in the markets we know people are concerned.  So hopefully these thoughts can help add a little light to something that may seem very “dark” and confusing.

I could bore you with details and go on and on about the possible cause (China’s economy slowing, a strong U.S. dollar, the Federal Reserve possibly raising interest rates in September, the collapse in the oil sector as well as other raw materials, etc.) but remember there typically is not just “one” event that causes this much volatility.

So you may ask what these events (external factors) might have to do with the U.S. stock market.  First, investors and market prognosticators are worried that individual companies that make up the stock market may begin to suffer lower earnings and slower revenue growth causing their stock prices to drop even more.  Additionally, there are some views that these events could cause our economy to enter another recession.

In terms of the U.S. our economy is currently in the best condition around the world.   Economic growth is not robust, but as economist Brian Wesbury says, “we are seeing a steady ‘plow horse’ type of growth.”  And though our oil industry is in the “doldrums” the U.S. consumer and our banking system is in much better financial condition (since 2008).  Other economic sectors such as retail sales, wages and housing starts are experiencing good growth.

In terms of the U.S. consumer we haven’t paid just $2/gallon for gasoline since March 2012, and unemployment is much lower with more Americans back at work today.  And regarding China… keep in mind that our exports to China only amount to 0.7% (less than 1%) of our economy.

As I am writing this today, the U.S. stock markets have just rallied to close up over 600 points (almost 4% on the day) from recently being down approximately 12.5% from their annual highs.  History tells us on average that we experience a 10% correction every 18 months (although the last was in October 2011) and 5% corrections occur as much as 4 times every 12 months.  Also, looking at the calendar August through early October is typically a bad time in the market.

So is there a positive in all this… yes!  There has been lots of money sitting on the sidelines waiting for lower prices to enter the markets.  These type of swings in the stock market are “buying opportunities” for new money that has been waiting for a good entry point.  During times like these investors can step in and “buy bargains” which also brings new money in to help support stocks.  After a period of time markets typically recover and go on to set new highs.

Our suggestion?  Step away from all this “clutter and noise” and try not to react.  Remember what you voiced when you started investing… a long-term perspective and that you realized markets would fluctuate (go up and also go down).  Research tells us when volatility kicks in, this is typically the time investors make “poor” investment decisions and suffer the consequences for years.  If you simply have the urge to try to “fix it” or you can’t handle what’s going on, then get professional investment advice now.

Remember we are here to help.  Please call us if we can help you or someone you know.

Another Melancholy September?

Wondering what might happen in the stock markets this month? Many think October (and some think August) is typically the weakest month for the Dow Jones Industrial Average. However, reading from the data, the chart above (Source: dshort.com) shows that September has historically been the weakest month since 1928. Additionally, according to dshort.com, September has averaged -1.3% in the DJIA since 1929.

Keep in mind history is not always a foreteller of the future. Consider last September in 2010 when the DJIA actually increased 7.7% (Source: Bloomberg). However that move could have been event-driven by the Federal Reserve “leaking out” in late August their intention to “flood” the markets with fresh money through QE2.

Only time will tell what will happen this September.

How We Are Seeing Things

Considering the most recent and possible trends, we want to update you on our position and how we see things going forward.

With the recent downgrade of U.S. debt, the political gridlock in Washington, continued deleveraging of global debt, particularly in Europe, and heightened consumer fears – it is possible that our economy could experience increased headwinds for some time. This could translate into slow to possibly even no growth, and continued volatile stock and bond markets. Therefore generally speaking we are tending to think a little more defensive going forward.

At this point in time we are hearing that the markets are “very oversold” meaning that we could see market rallies. If these happen, it is possible that they could be short-lived. So during any better times in the market, windows of opportunity could prove optimum times to make defensive adjustments, if needed.

Please understand we aren’t suggesting investors “run for the door,” so to speak. This reactive, fear-driven type of strategy often proves futile in the long run. Diversification studies show us that there will be asset classes that trend better for investors over others during specific periods of time.Also, we are hearing there are “pockets” of increased economic growth in certain “developing” areas of the world that is contrary to what we are seeing in the U.S. This being the case we will do our best to help clients sort through these facts to make wise investment decisions for their situation.

What you can do in the meantime…

  1. Stay calm and don’t panic. Remember, panic is not a strategy. It is a reaction. Be very careful how you are reading things, and try to be objective in order that you can make better decisions for your situation. It’s sad, but in times like these we hear and see new prognosticators that will try to predict “exactly” how things will turn out. No one can do this accurately every time! Also, friends and others will tell you what they are doing. Remember everyone’s situation is different (income, debt, goals, risk tolerances, background, family, etc.). So try not to “follow the leader” – it’s best to review your situation independently.
  2. Don’t do something emotional and stupid. In times like these advisors see clients do irrational things. You should already have a plan in place, and it’s important to remember that the plan is there for a reason – to help you stay on course. Making knee-jerk reactions can lock in losses (sometimes at significantly lower prices), and even have other consequences such as tax penalties, income or capital gains tax, and increased trading costs. In volatile situations people can feel overwhelmed, so it’s usually best to seek “wise, professional counsel”.
  3. Continue your 401-k and other retirement savings. Believe it or not, in times like these some people stop contributing to their retirement plan with the excuse that they don’t want to “throw good money away”.Remember these times – the market lows – are often the best times to continue buying. You could be getting more shares at lower prices while also continuing to reap the tax benefits associated with qualified retirement plans. It’s often what seems contrary or even wrong today that may benefit you the most in the longer-term.
  4. Re-assess your debt situation. It’s a good thing to pay down debt, especially higher interest rate debt. A good way to do this is to look for expenses you can reduce or cut out. Control emotional, impulsive buying decisions as you manage your spending plan. Also, consider the costs and benefits of driving your vehicles longer. Then take these savings and plow them right back into reducing your debt on a monthly basis.

It could also benefit you to refinance at today’s lower mortgage rates. We have recently heard rates are as low as 3.25% on a traditional 15-year loan, and 4.25% a 30-year fixed mortgage. Sometimes moving quickly and refinancing at reduced rates can allow you to use these savings to pay off your mortgage sooner. Also consider the advantages of reducing the term on your mortgage, such as reducing a 30-year to a 15-year period for more significant interest cost savings.

We will frequently review our “view of things” going forward and willperiodically note pertinent issues through our emails and blog – so please “like” us on Facebook or sign up for our Blog to receive ongoing updates.

In closing, during these more difficult times we will work hard to help sort through all the “noise” out there in order to help you make the right decisions for your situation.

 

The August 2nd Deadline

We all have learned it’s much better to make an “objective” rather than “emotional” decision. And with the national debt deadline less than a week away you may be wondering how the U.S. debt decision in Washington may affect you, your investments, etc. To hopefully help keep our thoughts rational and to try to “filter out” all the clutter (Fox News, CNBC, The Wall Street Journal, another Presidential speech, Congressman “political” posturing interviews, etc.), we are assembling questions to consider. Hopefully thinking through these questions will help you in your planning and to possibly help reduce some “hysterical” thoughts and knee-jerk tendencies to “fix it”.

1) Do our politicians and President have the guts and political muster to not compromise and place our Country in default? Would it be political suicide for some?

2) How long could a default last and what might it look like? (One Day, 1 Week, 1 Month, 6 Months, Longer)

3) Which is worse, a default or just a downgrade?

4) When could the markets begin to adjust for a default, what could it look like, and how long might it last?

5) What assets could be affected the least in a default? Which assets the most?

6) How could the S&P 500 Index behave (fluctuate like) in the following scenarios over the 1st day, over a month or more, or over a year or two:
— If a default is avoided…
— If a default and U.S. downgrade is avoided…
— If a default and U.S. downgrade happens, but is cured within a short period of time…
— If just a downgrade happens…

7) What might be the costs or benefits for an investor trying to “time” the outcome?
— If a default was prevented?
— If a default actually happens?

Posted by Randy Mascagni, CFP®

Mascagni Wealth Management — A Registered Investment Advisory Firm
205 E. Main Street, Clinton, MS 39056 — Phone (601) 925-8099 — Toll Free (888) 925-8099

Securities by Licensed Individuals Offered Through Investacorp, Inc.
A Registered Broker/Dealer, Member FINRASIPC.

Past performance is no guarantee of future investment returns.

Summer Update

With mid-2011 upon us, now may be a good time to provide an update on key economic issues and the market outlook. So let’s review the “macro” view of things.

If you will remember, last August the Federal Reserve announced their next strategy (QE2) to help support and possibly kick-start our slow economy. The markets read the potential positives of QE2, at least to the stock markets, and we saw the “best” September in years. The markets continued to rally through the end of the year and the mood of the consumer was more positive.

After the first part of 2011 we started getting more positive indicators such as increased retail sales (a good Christmas and consumers spending a little more), some signs of job improvements (even reports of companies hiring), and consumer confidence increasing. However mortgage interest rates rose and the housing sector was still showing signs of no improvement. Additionally gasoline prices at the pump jumped almost $1 approaching $4/gallon. It’s believed all the new money “sloshing” around in the economy created by QE2 found its way into the stock, commodities, and energy markets creating a “playing ground” for short-term speculators.

Now we are in the first of June, and we are hearing the economy isn’t doing as good as we had thought. For instance, economic growth (GDP) in the first quarter was only 1.8% (much slower than what the economy should be emerging out of a recession). Next, the jobs picture deteriorated again in May. And then finally the housing sector is extremely weak with some new price declines in some of the major markets (Florida, California, etc.). Remember up to this point we have been trying to restart our economy without any help from the Housing Sector, which is a very important part of our economy (construction, building materials, appliances, home furnishings, etc.).

So with all this being said, expect some version of the following this summer:

1) More, intense political wrangling and blaming from both sides. With Congress and the White House pushing the deadline to August to raise our nation’s debt ceiling expect more blaming and whining from our “adolescents” in Washington. When the deadline finally comes more than likely the debt ceiling will be increased with some compromise on government spending (but less than we need).

2) Gasoline prices. With the economy starting to signal a soft-spot, Europe continuing to have problems, and the emerging economies (China, India, Brazil, etc.) trying to contain their growth to minimize their inflation, it’s possible you may see noticeable gasoline price declines at the pump. In fact that appears to be starting to happen even now.

3) Mortgage rates. Mortgage rates have dropped again about 0.75% and credit-worthy people can now find 4.5% on 30-year fixed mortgages and 4.0% on 15-year fixed mortgages. This can actually become a great time for people to buy a home or refinance.

4) Volatile markets. Since the Federal Reserve’s QE2 program the markets have been very stable with lower volatility. In other words we haven’t seen many days where the DJIA dropped greater than 200 points. As the Federal Reserve unwinds QE2 you may see more volatile swings in the stock markets. So don’t be surprised and try not to let that scare you.

How are the markets going to respond to all of this? Well, no one knows. Remember everyone thought this past September would be horrible and it was the best single-month September ever for the stock market. Also keep in mind after the major crash of 2008-2009 and in a very, unprecedented scary time in our economic history the DJIA has gained 92.0% (3/9/2009 – 5/31/2011, WSJ).

Now I could speculate and you will hear others who will tell you “exactly” what they believe the markets will do. Further, you can go out and buy all the books you want telling you what’s going to happen both now and later. In fact if you like “horror or fiction” there are plenty new books written about America’s doom days ahead. But understand that we’ll only know “for sure” after it’s happened!

Yes, your investment allocation needs to be correct and needs to be reviewed and adjusted periodically which we will continue to do for our clients. But please try to not let this stuff scare you or cause you to “derail” from a well thought out investment plan. And if you feel the need to “time” your investments (in and out of the market), then let me direct you back to our blog to an earlier post titled “A Crash Overhang”.

So in summary, go about your life and enjoy it. Try not to try to react to what you are going to hear (or even try to fix). And this summer may be a good time to avoid the Business and News TV channels as they hype all the negatives.

Market Update March 17th

We hope things are starting off well for you in the beginning of Spring. Due to all the recent events I thought it best to update you on what we are hearing.

The markets have given back a portion of the growth we have seen since the market bottom March 9th of 2009. According to the Wall Street Journal, remember the S&P 500 index has increased 85.8% from this low through last night (March 16). Keep in mind it’s typical for markets to consolidate and lose some ground when they gain so much in this type of time frame. Now with the recent Mid-east tensions and the Japan earthquake some market volatility has reappeared and uncertainty has risen.

On a conference call yesterday with Fidelity Investments we learned the following regarding Japan. First, the next couple days are critical as Japan struggles to get control of their nuclear reactors. Assuming the outcome improves and avoids a horrific outcome we could see the market rally fairly quickly.

Next, with Japan considered a Tier 1 supplier to global manufacturers in the auto, tech, and electronic businesses, supply interruptions are still unknown. As global manufacturers scramble to offset Japanese components we could see time delays to product production. It appears there are alternative suppliers stepping-up and offering supplies to offset most Japan delays.

As time goes by and Japan begins to rebuild this could prove stimulative to Japan’s economy as well as globally as they buy steel, wood, concrete, industrial equipment, etc. Keep in mind this can create more inflation as well as higher interest rates.

In terms of the oil situation, as of late, we have seen the oil markets calm down and give back some of their gains. It appears other OPEC countries are stepping up and offsetting the Libyan supply interruptions. The real question is can Saudi Arabia avoid the political unrest experienced in Egypt and Libya. We sure hope so. All of this heightens the need for an effective energy policy here in the U.S. Who knows, these recent events could force Congress and our Administration to deal with our long-term energy problems.

In the terms of the U.S. economy we have seen some improvement since the latter part of 2010. Unemployment has declined and both the consumer and businesses are beginning to spend money. And other than higher gas prices, consumer’s attitudes appear to be more positive. Also, we are hearing that small investors are slowly re-entering the equity markets.

In summary, it almost never benefits an investor to react to these types of events and short-term trade in this financial environment. Keep in mind, for mutual fund investors, money managers and their analysts have a plan and make the necessary changes as they “objectively” see the need. They have much more information than we can imagine. As of recent we have heard mutual fund managers use this type of short-term fear to buy good stocks and bonds that become very attractive due to the market volatility.

We hope this helps and we pray for our Japanese friends. The effect on Japan’s people is so much more important than any of our financial concerns.

Is this the Same Kind of Fire?

Being burned so badly in 2008-09, many investors are wondering why the markets are selling off and if this is a repeat of the last big correction. No one can say for sure, but this correction doesn’t feel like the one we experienced in ‘08. Here are a few factors we are hearing that may be the cause.

1) Necessary Correction due to large run-up the last 12-months. Since the March 9th low in 2009, the S&P 500 rebounded 79% through April 23rd high close in 2010. This is a pretty significant rebound, so profit-taking or some amount of correction should happen eventually as this is a natural cycle for markets. Interesting to note, since April 23rd the S&P 500 has corrected -12% through May 26th. (Sources: Morningstar, Inc. and Wall Street Journal)

2) Global Economic & Debt Issues (Euro-zone countries). In the news as of late are the government debt problems in Greece, with the possibility of spreading into Spain, Portugal, Ireland and Italy. Remember Greece is only approximately the size of the state of Indiana. Nevertheless up to this point Europe has not convinced the investment community that they will make the tough decisions and deal constructively with their serious government debt issues. If Europe gets it’s act together, we could see the markets improve overnight.

3) Possible Global economic slow-down affecting the U.S. Economy. We now live in a Global economy as many U.S. companies (Caterpillar, Proctor & Gamble, GE, IBM, Cisco, etc.) sell some of their goods and services outside the US. If these foreign customers buy less goods and services from us, then our economy could slow down again. This is why we are starting to hear news services talk of the possibility of a “Double-Dip” Recession. Hopefully Europe’s problems won’t be “systemic” and spread, but no one knows for sure at this point in time. Outside of this, the U.S. economy is slowly improving and appears to be able to weather Europe’s problems.

4) Geo-Political Issues. From the North Korean/South Korean conflicts and the continuing Iran/Israel nuclear saga create political uncertainty which can also revamp market volatility. Plus many legislative changes coming from the White House and Congress such as Finance Reform, Healthcare Reform, talks of Cap and Trade, etc. indicate to the markets that the government is growing in both control and debt. Until these issues settle down, potentially larger government can produce some degree of uncertainty and increased market volatility.

Remember the markets hate uncertainty. When uncertainty exists, markets tend to increase in volatility and money begins to move around, increased hedging can occur, and securities can become shorted, etc. All of this makes market direction almost impossible to determine on a short-term basis. This is why advisors strongly suggest that investors not get caught up in making knee-jerk changes to short-term corrections.

Hopefully this helps explain some of the reasons we are experiencing so much continued volatility in 2010. Though we may be wrong, what we are hearing is that this should not be a repeat of the market problems we experienced in 2008. We are still hopeful and believe markets will settle down at some point, usually when we least expect it. The advice we can give is that it’s usually best for an investor to develop good, long-term investment plans that can weather the many short-term bumps in the road. Quite possibly, if an investor can’t do this, they may need to avoid non-guaranteed investments (stocks, bonds, etc.) and settle for potentially much lower returns.

In the meantime consider these positives: declining interest rates (30-year mortgages are now below 5%), cheaper gas prices, as well as zero inflation. Hopefully some short-term positives will put more money in your wallet while you wait for your portfolio to grow again.

A Crash Overhang

One of the unfortunate hangovers from the 2008–‘09 market crash has been some investors continuing to try to “time” the market with their mutual funds. We continue to hear that small retail investors, and usually those without an investment advisor, have not completely returned to the stock market. Whether this is with their 401(k) plan or other investment portfolios, some investors have missed much of the recent recovery employing some unproven strategies.

Frankly I can understand their concerns and fears and their desire to be out when the next crash happens. The problem is there’s usually no one who knows exactly when the next correction will happen. Consider this… since March ’09 the stock market has grown back in spite of all the negatives we hear in the news today, while many have warned another correction is coming. Sometimes in the industry we hear this referred to as, “the market climbing a wall of worry.”

Remember that a strategy of “market timing” almost never works to improve one’s overall return when considering a full market cycle (from the peak, to the valley, and back to the peak again), particularly with mutual funds. This can be validated by third-party research and is why you hear most Investment Advisors discourage market timing. However, I must say moving out of the market can be an effective means of reducing fear.

I have found some of the confusion comes for personal investors as they have heard and read investment language (reduce stock exposure, increase cash position, expect a market pullback, stop-loss, limit order, etc.) that typically can be effective when trading individual stocks. Don’t confuse this with investing in mutual funds. According to Vanguard, mutual fund investing provides greater diversification as, “a single mutual fund most likely holds more securities than you could ever buy on your own. An advisor handles the fund’s investment management responsibilities, taking the burden off of you.” Therefore, remember that an actively managed fund manages within its prospectus objective in light of what is happening in the economy.

Also given the logic that investing in individual stocks can be significantly more risky than investing in stock mutual funds, it’s logical to conclude that you can also lose more in individual stocks. This contributes to why we saw many individual stocks decline much greater than stock mutual funds over the recent 2008-’09 market correction. Consider as Investorguide.com explains, “Earning a high level of return requires taking more risk, but taking more risk does not always equate to a higher return. No matter what you invest in there is an inherent level of risk associated with all investments.”

So in the end, unless there becomes a serious market correction, which doesn’t happen very often, mutual funds may not offer enough volatility to pay off using common timing strategies. In other words, mathematically it’s very difficult to make it work. As we have learned in the last correction, a market correction is not a clear signal that another major correction is around the corner.

In summary, there are some strategies that can help worried investors that are concerned of market risks. But quite frankly, and contrary to what you may hear, market timing usually does not improve the overall long-term return. And if you feel advisors are not forth coming about timing, ask your investment advisor if he “times” his or her mutual funds.