Wealth Management Blog

Posts published in October 2014

Volatility is Back…and We’re Not Worried

By JJ Burns

October 17, 2014

The past six weeks or so, since the beginning of September, have been pretty unsettling for stock market investors. After three years of annualized price returns between 18% to 19% per year for U.S. large-cap and small-cap stocks through the end of August, the period from Sept. 1 to yesterday’s close has seen declines of about 7% for stocks of all types. That matches the worst multi-month decline over those three years for most stocks. (Small-cap stocks had a maximum decline of about 11% in the fall of 2011). International stocks didn’t fare as well over that three-year period, and have performed worse than U.S. stocks over the past six weeks. Does this mean the bull market is over and people should sell stocks? Far from it.

All markets need some volatility to make price discovery and investment research viable. No market – bonds, stocks, gold, oil or real estate – goes up year after year without some reversals. Markets are also wired to accept bad news more than good; by that, I mean traders and investors always look for a dark cloud, even when news or data releases are good. For example, U.S. investors have had to digest the following events and issues over the past few months: an Ebola virus outbreak, economic weakness in Europe, slowing growth in China, continued tensions between Europe and Russia over Ukraine, multiple wars in the Middle East and the ongoing dissatisfaction with the state of U.S. domestic affairs topped off by a looming mid-term election. But if we examine the facts, here’s what we see:

  • U.S. household net worth has rebounded to a level 20% higher than the peak prior to the decline in 2007.
  • Total debt for households and nonprofit organizations equaled 77% of gross domestic product, the lowest level since 2002. Declines in household liabilities are mostly due to lower mortgage debt.
  • The federal budget deficit is falling.
  • Oil declined to a near four-year low, and average gasoline prices are down 13% from a high in April, potentially putting more money in consumers’ pockets right before the holiday season.
  • Predictions now are for a milder winter this year compared to last; with potentially lower heating fuel prices, that’s good news, too.
  • The dollar has climbed 5% since June, making imported goods look more attractive.
  • Unemployment is lower, more people are working and wages are beginning to rise in some sectors.
  • Interest rates are low and have declined in spite of constant predictions of a rise over the past 5 years.

There are always a broad range of views about any event, positive or negative, that offer likely outcomes and their potential impact on the financial markets. Investment professionals struggle to consistently add value for clients by correctly analyzing the result of all of these constantly changing macroeconomic events. History, however, suggests that those looking for certainty around such events before investing could be setting themselves up for a long wait. There is always something to worry about. Is risk being appropriately priced? Are prices being kept too high and is volatility being unnaturally suppressed by the central banks? Will Europe rebound, and when? Who will triumph in all the military struggles we’re watching? Will China really manage a ‘soft landing’ for its overheated economy? Will there be an Ebola epidemic in the U.S.? What is the average investor supposed to make of all this conjecture?

We believe there is a much simpler approach. It begins by accepting that the market price for an investment is a fair reflection of the collective opinions of millions of market participants. This means we do not bet against the market, we work with the market. We build diversified portfolios around what is known of expected returns according to your particular circumstances and risk profile. It does not mean constantly reacting to the opinions of market pundits about what might happen tomorrow, next week or next year. Nobody – repeat, nobody – knows what will happen. Staying disciplined and focusing on the things that you can control, which are asset allocation, regular portfolio rebalancing and investment expenses, are the key ingredients for long-term success. Our signal for rebalancing your portfolio is the need to maintain or adjust YOUR asset allocation, not media speculation and fear-mongering. Remaining calm and focused on this strategy allows us to benefit during periods of volatility.

Is volatility back? Yes. Are we worried? No.

Turmoil + Volatility = Opportunity

By JJ Burns

October 10, 2014

The stock market is reminding everyone that progress is always made in fits and starts. While the market overall is higher for the year, the Dow Jones Industrial Average was off 1.4% in September and has slipped more than 3% since peaking on Sept. 19; the Nasdaq Composite Index off more than 4% since early September.

There's been a lot of handwringing over the small-cap Russell 2000 Index's 10% decline since peaking in July -- which means it's in a correction. The Wall Street Journal noted there’s concern that the Dow hasn't suffered a sustained fall of 10% or more in over 700 trading days, the fourth-longest streak since 1945.  Furthermore, Europe is showing more signs of weakness as the dollar is increasing in value.

We suggest everyone relax a little though; here's why:

  1. The stock market usually experiences at least one big pullback a year. So what's happening now isn't out of the ordinary and isn't that big. For example, the Dow fell 5.3% in January.
  2. Pullbacks end.  The fourth quarter has shown decent gains in 11 of the last 14 years.
  3. The economy is stronger, no matter what you hear. A stronger economy should mean better profits for corporations, which means stocks should rise.
  4. There are more jobs and a higher “quit rate” which signifies workers are confident they’ll get better employment as more jobs are available. 

We at JJ Burns & Co. believe short-term trading is gambling, pure and simple, and we're not gamblers. We don't believe investors should worry about the market's daily gyrations except to look for long-term bargains. As the Dow was falling 238 points last Wednesday, Berkshire Hathaway's Warren Buffett told CNBC on Thursday he bought stocks.

While it is true the stock market is not having a big year, remember that 2013 was a home-run-year, with the Dow up 26.5% and the Standard & Poor's 500 Index up 29.6%. Moreover, the Dow has risen more than 155% since March 2009, the low of the financial crisis, and the S&P 500 is up more than 185%.

It's the long run that's key for us and should be for you. Stocks (and capitalism) are the best long-term inflation and growth vehicles.  Period.

We think the economy's long-run prospects are good, and we're about helping our clients tailor their investments to be long-term winners.  If you worry too much about what the stock market does day-to-day, you probably don’t have the right asset mix and you're letting your emotions dictate your investment decisions.  So take a little time to examine your position critically. Try to understand how the components of your portfolio will perform if the downturn turns into a broad correction. Then make sure your investments are diversified enough to weather the storm and set up to generate long-term growth.

Finally, it's OK to be tactical, like Warren Buffett, and periodically look for bargains that will pay off over the long-term. That’s what good investing and strong wealth management is all about.