In a recent article by Bryce Sanders in a commentary written for ThinkAdvisor magazine, we were reminded that “Television programming is funded by advertising. Advertisers want viewership. One of the best ways TV news programs can keep people watching is to make everything a crisis.” While news is important, it’s still necessary to step back and put things into perspective. For example, with the Dow Jones Industrial Average trading around 25,000 it’s important to realize a decline of -799.36 (as we saw on Tuesday, Dec 4) is a -3% drop. Did you know that for all of 2018 we have seen four daily declines of greater than -3% and this was the smallest of them? These were on Feb. 5th, Feb. 8th, Oct. 10th and then again on Tuesday, Dec. 4th. To the contrary, we have seen five days with returns greater than +2% and 26 days with a positive return greater than +1%. The market will fluctuate. But remember from each of the previous declines we eventually recovered. The amount of time varies. Sometimes it was within a week and as we saw in 2008 it took a handful of years. The important thing to put into perspective is not every decline is a “crisis” and investors who stuck to their plan and didn’t panic eventually recovered, often going on to new investment highs. Talk to your financial advisor to help put today’s volatile markets into perspective.
With the recent volatility in the stock market, and bad news on every TV channel, we thought this article from Brian S. Wesbury, Chief Economist with First Trust, might help provide a good “snapshot” of things. Click here to view the article… and please don’t hesitate to call if you have questions or concerns.
In life we all experience times of trouble or difficulty. In fact, life tends to cycle from good times to bad and back again. But when rough times come, seldom is it a good thing to panic… to react by making decisions out of fear or emotion, or even worse, to run from the trouble at hand. One thing I’ve learned recently is when life has it’s difficult times, we are wise to lean into those troubles and work through them. And we aren’t successful in this by doing it alone… friends help, mentors, family and even God is there with us in the midst of our troubles.
Financially speaking, we must realize that our investments will also face turbulent times. Just as in life, markets cycle and various investments go in and out of season. The real question is when the volatile times come, how do we handle them? A little encouragement is to avoid two common mistakes: don’t react on emotion, and don’t try to face these times alone. When working with a financial advisor you aren’t alone. They can provide objectivity on your portfolio and help you through choppy markets.
The other lesson learned is that we do eventually get through the rough waters (at some point). Of course, stock markets don’t recover overnight. On average one 20% correction occurs every five years, but their recovery times vary. According to Bloomberg, in 1974 the market suffered a -37% loss and took over five years to recover… but from 1981-1982 the market suffered a -25% correction and only took 83 days to recover. And of course we are recently familiar with the corrections from 2000-2002 and also in 2008.
So what do we take away from this? In the tough times don’t panic and avoid making quick, emotional decisions. Remember the proverb that states, “The plan of the diligent lead to profit as surely as haste leads to poverty.”
Europe. But before we try to explain, let’s remember all the problems when we turned the corner into September. The markets were burdened with the possibilities of entering another U.S. recession, Europe had debt issues, there was a recent downgrade of U.S. debt, and it appeared our politicians in Washington were adding on more issues. Not to mention we were still dealing with supply disruptions and Japan’s economic fears caused by the Japanese earthquake.
Now it appears most of these fears, except Europe, have dissipated for the time being. Moreover the U.S. economy is showing some signs of growth, corporate earnings have held up fairly well, and the S&P 500 has regained 8.5% since the bottom on October 3rd according to Morningstar data.
So what is Europe’s problem? It seems the culprit could be the four letter word: Debt. More specifically, as the fallout from the U.S. sub-prime mortgage problems spread and economies around the world slowed, the so-called “PIGS” of Europe (Portugal, Italy, Greece, and Spain) showed signs of defaulting on their debt. Many believe the reckless, socialistic government spending of the past, as well as weak economies may have brought some other small countries into risk. And not being under one government rule, both the citizens and politicians in the stronger European countries (France, Germany, etc.) may not be willing to provide the necessary aid these countries require.
Yes, we have serious government debt issues in the U.S. As of recent we have seen our politicians “kick the can” down the road. The most recent occurrence of this was the Super Committee failure last week to provide significant helpful solutions.
Sure we could eventually be exactly where Europe is today, and with serious ramifications. However as for now, and excluding our government debt, our banks, consumers, and corporations have made significant progress since 2008 in improving their financial position and building larger amounts of cash to possibly weather another storm if it comes.
What could the European problems mean to our economy? On Monday’s CNBC broadcast, the discussion mentioned that the possibility Europe’s “pain” could actually be our “gain”. In other words, more foreign capital could find its way to the U.S. (via investments into the U.S. dollar and treasuries) and eventually make its way into our stock market. But more serious pains could rise up, according to Miles Betro of Fidelity Investments, should there be a major bank failure in Europe. He suggests that we could see another “Lehman-type” event that could trim as much as 1.5% off our economy (GDP). If this happens we could move right back into a new recession.
So when will this volatility end? The consensus among investment experts is no time soon. It appears it’s going to take more time and pain before days become a little more predictable for the markets. Please know we realize this may be a scary and even tiring time for investors to see markets drop 200 to 300 points in the matter of just a few minutes. If we may suggest a helpful “tip” remember that volatility can also work to the upside. Just yesterday we saw the DJIA up 291 points.
And finally, try to focus on what things will be like a year or two from now rather than the next day or even month. In other words, could the deals today be the catalyst for better performance down the road? We believe so, and look forward to that day! Is this not the true definition of an investor?
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.
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…
- 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.
- 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”.
- 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.
- 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.
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.
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.
It’s more and more commonplace to have a discussion with someone who must come to grips with what Dennis Gartman calls the “viciousness of percentages.” This is simply the average one needs to obtain to regain from a loss, “the cost of getting even.” Remember, a loss of -25% one year and a gain of +25% the next year does not get you back to even. Instead, this leaves someone a good bit behind “par” and the greater the loss, the greater the required return on capital to get back to even. Therefore, find below a chart that illustrates the average gains necessary to regain from a loss:
In summary, the lesson here is really quite simple: keep your losses to a minimum. In other words, what is your risk tolerance level and how long do you have to invest? Make sure these match up accordingly and don’t put too much at risk without the proper amount of time necessary to ride out short-term volatility in the market.
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.