“Ladies and gentlemen this is your Captain speaking. It appears we’ve hit a bit of turbulence. For your safety and for those around you, please stay calm, seated and keep your seatbelts securely fastened”.
If you fly enough, you have undoubtedly heard an airline Captain say these words. Many passengers would find it more comforting to hear the Captain say the following: “This turbulence is normal and is to be expected. We never know when it will hit or how long it will last, yet it’s important for everyone to know that we built this into our flight plan before takeoff. Please know that we are making the necessary adjustments to our flight plan which are based on the fundamental principles of flying. I understand this can be a bit frightening, however it is important that everyone remain seated and calm. While I also know that it feels like this time it’s different, it’s not. This is normal and we will pass safely through it. And as a friendly reminder, we’ve experienced this turbulence many times before during our flight and we’ve always made it through okay.”
The same advice can be given about the recent events in the financial markets. Turbulence must be expected and investing is never a smooth ride.
The volatility we are experiencing this week is normal. In fact, since the beginning of this prolonged bull market which began in 2009, there have been 9 times that we have experienced this type of volatility. The three most recent pull backs are highlighted below:
- January 2016 – Over the course of three weeks the S&P Index was down 11 percent and by April of that year all the January losses were gone.
- August 2015 – A 1,000-point drop in the DJIA on August 24th. The S&P lost 11 percent over the course of six sessions only to recover the losses in the next two months.
- October 2014 – There was a 460-point rout in the Dow average on Oct. 15, widening a selloff that started a week earlier to 5 percent. The rout faded as quickly, and the Dow recouped all the losses in the next two weeks.
Even for the most disciplined of investors, this week’s market volatility is bound to strike up some negative emotions. This is completely normal. The key is to not act on those emotions or make irrational decisions.
What is causing these market moves?
- U.S. equities have had an unprecedented run and we were overdue for a correction. Since the election in 2016, the S&P 500 gained 32% peaking on January 25th without any substantive pullback. In the month of January alone, the S & P 500 ran up 7.4% to a new high before experiencing the current market turbulence. These upward moves, while pleasant to investors, are unsustainable without consolidation. Even though the economy looks promising going forward, corporate profits are rising, and tax cuts should spur additional growth, the financial markets simply got ahead of themselves. The economic fundamentals are still intact and we see no signs of a slowdown on the horizon.
- Investors had become complacent. As the equity markets reached new highs, many more investors piled in pushing the markets up further. We saw risk parameters of investors change, eschewing the safety of bonds for big gains in equities. These investors lost sight of the fact that stocks could be volatile and as quickly as they piled in, they are retreating. Additionally, the Bitcoin phenomenon has taken on a life of its own. We believe this is the epitome of speculation. Speculators piled into Bitcoin driving it up to over $19,000 looking for quick gains. Most people who invested in this cryptocurrency did not understand the fundamentals, they did it to make a quick buck. As of this writing Bitcoin is valued at $8,300. The risk of stock investing was not enough for these cryptocurrency speculators, they wanted more risk and got burned. We do not invest in cryptocurrencies at JJBCO but we use investor sentiment in it as a gauge of fear and greed in the overall markets.
- Interest rates have been rising and this has a tendency to scare equity investors. Since September of 2017, the yield on the 10 year US Treasury Bond has increased from 2.06% to 2.85%. Why would this be a concern? Markets get nervous when yields rise because of competition for investment dollars. If an investor has an opportunity to lock in guaranteed income at higher rates they may be less likely to take the risk of investing in stocks. We believe the orderly increase in bond yields is a good thing. It shows that the economy is strengthening and it will allow our clients who need retirement income to meet their needs without subjecting themselves to undue equity risk.
At the end of the day this market turbulence we are experiencing is not unprecendeted….it is normal. Yes, it is unpleasant to go through and it will shake some weaker hands out of the market. The key is to have a target allocation and a plan. Many investors just react with emotion because they do not know what they are investing in or the goal they are investing for. We build portfolios on sound fundamental principles of investing which include:
- Asset Allocation – The long term mix in your portfolio of stocks, bonds and cash.
- Diversification – Within each asset class holding a globally diversified portfolio built upon the dimensions of returns.
- Rebalancing – The simultaneous buying and selling of assets to maintain your target allocation and manage the risk inside your portfolio.
What happened in the markets over the last two weeks is normal. There is no need to panic. The fundamentals of the economy have not changed. If you have any questions or wish to speak to us directly please feel free to contact us.
On behalf of your NY based flight crew, this is your Captain signing off.