Wealth Management Blog

Posts tagged Stock Market

Turmoil Sells

By JJ Burns

March 23, 2018

Tariffs, trade wars, interest rate hikes, the Facebook data scandal, the omnibus spending bill…Today’s headlines are filled with market turmoil and it appears that everyone is tuning in. The question many investors are asking is “Should I be concerned and if so what should I do about it?”

The market is volatile, there’s no doubt about that. Volatility is normal, it is to be expected. The challenge that many investors face is that they are bombarded on all fronts by stories, opinions and so called expert recommendations. In today's on-demand era, “wait and see” can be a frustrating tactic. Yet consider it this way: Markets discount widely-known information. Expectations for $60 billion in tariffs and corresponding retaliation from China are probably baked into prices now. If Thursday’s volatility is any guide, investors are generally unhappy with this possibility. But as markets look forward, they move most on the gap between expectations and reality. Compared to what people evidently fear today, even watered-down tariffs would be a positive surprise. Heck, even simple math might be a positive surprise: $60 billion amounts to just 2% of total 2017 imports. That’s not a lot. If China retaliates in kind, they would apply further tariffs to just 2.6% of the US’s total 2017 exports which is also not a lot. Seems to us like there is a lot of room for negative sentiment to catch up to a more benign reality.

Most people are long term investors who are targeting a specific rate of return based on their individual goals. What people often forget is that when targeting an annualized rate of return you will have vast differences in year over year returns. In fact, there are few years when either stocks or bonds delivered returns that are even close to the market averages.

To illustrate this point, between 1926 to 2016 the annualized return for U.S. stocks was 10.16%. During that time returns fell within 2 percentage points of the annualized return of 10.16% in only 6 of the 91 years.

When considering the U.S. bond market, between 1926 to 2016 the annualized return for the U.S. bond market was 5.37%. During that time returns fell within 2 percentage points of the annualized return of 5.37% in 24 out of 91 years.

Financial markets, particularly stocks are inherently volatile over the short term, as we are once again experiencing.

When we understand, and come to peace with this data, we can begin to understand equity volatility as a positive phenomenon, and in fact the reason for the premium return from equities. The term “volatility” refers to the relatively large and unpredictable movements of the equity market, both above and below its permanent uptrend line. Equities can, and frequently are, up over 20% one year and down 20% the next, and vice versa. However, if we accept that the long run returns of equities will approximate the past return, we begin to understand that these periods of downside volatility must likewise at some point be corrected by a period of upside volatility, greater than the long-term average of roughly 10% per year.

The premium returns of equities are, therefore, the efficient market’s way of pricing in adequate compensation for tolerating such unpredictability. Volatility is the reason equity investors are rewarded over time with premium returns, as long as we have the emotional strength to live through it. Volatility is not to be survived, it is to be embraced and thrived upon.

You Have a Plan

The very best investors have a disciplined approach to making portfolio decisions, and always stick to their plan, no matter what the rest of the world is doing. They are able to live through the peaks of euphoria, as well as the depths of terror, with a healthy understanding that a well-designed written investment and financial plan will get them through both.

No predictions. No witch doctor investment sorcery or magic investing formulas. No “Black Boxes.” Just hard work, patience and discipline.

Turbulence in the Markets

By JJ Burns

February 10, 2018

“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?

  1. 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.
  2. 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.
  3. 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.

As Goes January, So Goes the Year?

By JJ Burns

January 31, 2018

As the year begins, the pundits and talking heads are out in full swing with their predictions for 2018. But can anyone really predict the future consistently and predictably? Much of what investors see in the financial media is just noise. Some of that noise appears to be based on fundamentals but when one digs deeper, this is rarely the case.

For example some of the more popular headlines are about the “January Indicator” or “January Barometer.”

This theory suggests that the price movement of the S&P 500 during the month of January may signal whether that index will rise or fall during the remainder of the year. In other words, if the return of the S&P 500 in January is negative, this would supposedly foreshadow a fall for the stock market for the remainder of the year, and vice versa if returns in January are positive.

So have past Januarys’ S&P 500 returns been a reliable indicator for what the rest of the year has in store? If returns in January are negative, should investors sell stocks? The chart below shows the monthly returns of the S&P 500 Index for each January since 1926, compared to the subsequent 11-month return (i.e., the return from February through December). A negative return in January was followed by a positive 11-month return about 60% of the time, with an average return during those 11 months of around 7%.

This data suggests there may be an opportunity cost for abandoning equity markets after a disappointing January. Take 2016, for example: The return of the S&P 500 during the first two weeks was the worst on record for that period, at -7.93%. Even with positive returns toward the end of the month, the S&P 500 returned -4.96% in January 2016, the ninth-worst January return observed from 1926 to 2017. But a subsequent rebound of 18% from February to December resulted in a total calendar year return of almost 13%. An investor reacting to January’s performance by selling out of stocks would have missed out on the gains experienced by investors who stuck with equities for the whole year. This is a good example of the potential negative outcomes that can result from following investment recommendations based on an “indicator.”

Conclusion

Over the long term, the financial markets have rewarded investors. People expect a positive return on the capital they supply, and historically, the equity and bond markets have provided meaningful growth of wealth. As investors prepare for 2018 and what the year may bring, we should remember that frequent changes to an investment strategy can hurt performance. Rather than trying to beat the market based on hunches, headlines, or indicators, investors who remain disciplined can let markets work for them over time. At JJ Burns & Company, we adhere to a disciplined investment strategy focused on broad global diversification, asset allocation, rebalancing, dollar cost averaging and managing costs.

Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Diversification does not eliminate the risk of market loss.
There is no guarantee investment strategies will be successful. Investing involves risks including possible loss of principal. Investors should talk to their financial advisor prior to making any investment decision. There is always the risk that an investor may lose money. A long-term investment approach cannot guarantee a profit.
All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their financial advisor prior to making any investment decision.

Mr. or Mrs. President?

By JJ Burns

November 4, 2016

Everyone is afraid of something.  It’s true.  The visceral reaction to threats, real and imagined, has driven human behavior for millions of years.  As time has passed, our species has evolved from fearing simple threats from predators and harsh climates to fearing more sophisticated threats.  We have mostly conquered our ‘lizard brain.’  The lizard brain (so called because it is believed that reptiles survive almost solely on its impulses) is the amygdala, which controls emotions such as fear, our survival instincts, and memory.  Controlling fear is how our ancestors emerged from the cave and conquered predators and darkness.  Now, millennia later, what are we most afraid of?  According to Chapman University’s 2016 ‘Survey of American Fears,’ Americans are most afraid of government corruption than any other of the additional 79 topics in the survey.  That’s right: we are more afraid of our own government than we are of death, disease, loneliness, war, climate change, going bankrupt, snakes and public speaking.  This year, it appears, we are also afraid of our future.

Some of our recent discussions with clients have surfaced their biggest fear: the outcome of our national elections on November 8.  As we might expect, investors are worried about the future because of heightened dislike for many of the candidates and an uncertain future for the economy, the markets, and their portfolios.  Their collective lizard brain says sell stocks and hide, much like our primitive ancestors, and emerge when the perceived threat has passed.  As we often say, we understand this reaction.  We know that the markets, like people, hate uncertainty.  We also know that managing our emotions – especially conquering fear – in trying times is the key to success in any endeavor.  So it is today.

Remember that the market has weathered many crises since 1900: two world wars, the Roaring ‘20s, the Great Depression, the first big market crash in 1929, oil shocks, wars in Korea, Vietnam and the Middle East, the 1987 flash crash, the Tech Bubble, high inflation, low inflation, terrorist attacks on U.S. soil, the Financial Crisis, a government debt downgrade, landing a man on the moon, the Ebola and Zika scares, ISIS, the beginnings of climate change, banking crises, the rise of the internet, the rise—and fall—of communism, and so on.  Through all these events, capitalism has survived and adapted and moved forward.  We believe it will again regardless of Tuesday’s election results.

Here’s our brief summary of the main issues to consider when thinking about the election and the post-election markets:

  • The U.S. economy is chugging along in a low-growth/low-inflation environment.  A recession is not on the IMMEDIATE horizon, interest-rate hikes are expected to be modest and drawn out, and the job and housing markets are stable.  Preliminary Q3 GDP came in at +2.9%.  As we write this, October’s payrolls number was good and included prior-month positive revisions, unemployment dropped to 4.9% and wages showed their highest year-over-year increase since 2009 (ending at +2.8%).  Even market news is good: S&P 500 earnings results thus far for the third quarter of 2016 are showing improvement over the past six quarters.  These data show expected improvement for the current quarter and into 2017.

  • The Fed is expected to use the calm after the election storm to raise short-term rates by 0.25% in December, with two additional +0.25% hikes expected next year.
  • The markets, and a narrow majority of the electorate, appear to favor the Democrat candidate.  Mrs. Clinton has proffered a platform of change, but nothing that we see as too radical.  We expect that, should she win and the U.S. Senate change control, that modest incremental legislation will be enacted to (among other things) change the tax code, work on regulatory and immigration reform and review U.S. trade pacts.  The markets have, and should continue to, respond modestly.
  • Many of our clients have stocks and bonds in their portfolios.  The stocks are expected to provide long-term growth to keep ahead of inflation; the bonds provide income and act as ballast when markets are especially volatile and investors seek safety.  Adjusting this mix by using rebalancing opportunities is our best tool to keep our strategic focus and avoid costly tactical mistakes.  This is what we do.

Investors need to battle their lizard brains and keep their focus on the future, not the short term.  The initial fear trade is to sell and go to cash; a tried and true short-term palliative, selling stocks and sitting in cash is good for short-term peace of mind but not a long-term planning strategy.  Our clients know that we believe in globally diversified portfolios, that we focus on the long-term, and consider strategy over tactics to ensure that portfolios are built to stand the weather of time rather than simply avoid today’s storm.

As always, we appreciate your confidence and would be happy to discuss any of the issues raised here or answer any questions you may have.

Who’s Picking Up the Tab?

By JJ Burns

September 27, 2016

Have you ever been out to a great dinner, or on a great vacation, or perhaps at a great show, really enjoying yourself, yet knowing in the back of your mind that the bill for this great experience would come due, and it might be a doozy? Think about that experience and feeling, apply it to today’s markets, and ask yourself: how will investors feel when it’s time to pay the bill?

We’re not writing this to imply that a market crash akin to the Financial Crisis is just around the corner; far from it. We see ourselves in a slow-growth world that is a result of the experimental monetary policy by governments and central banks (CBs). They are manipulating interest rates without providing comparable fiscal stimulus to recover from a financial downturn, and as a result, these easy rate policies around the globe have lulled investors into a false sense of complacency.

Just looking at this small sampling of market returns gives us some idea about the effects of the CB’s policy of low rates:

During the period when the U.S. Fed embarked upon its Quantitative Easing programs (QE) and Operation Twist, the stock and bond markets earned much of the total returns since the low of the Financial Crisis. Other central banks, particularly in Europe, chose different paths that focused initially on austerity and had less robust results (e.g. a ‘double-dip’ recession in the U.K.). Across the globe, however, it appears that the ability for continued monetary policy stimulus to drive growth is limited. We are left with stagnant growth levels, negative interest rates in many countries, market uncertainty and growing populist movements that promote nationalism over growth.

Central banks are not united in policy goals, governments and corporations are not engaging in enough (if any) fiscal stimulus, and the world’s growth engine for many years—China—is retrenching and transforming. All of this leads to a suspicion that stocks and bonds are overpriced, particularly on the part of income-seekers driving money into utilities and other high-dividend stocks. This is clearly an important inflection point. We must accept that issues that have become political ‘hot button’ talking points—global trade, immigration policy, tax reform and populism—are perhaps now more important drivers of future growth than furthering the low interest rate policies that have dominated the past seven years.

Investors have asked us, are we worried about a bear market? A combination of several indicators turning bearish would cause us concern, such as much higher interest rates and inflation, an inverted yield curve and stock overvaluation. Recent market gyrations seem to be overreactions at this point; U.S. economic data do not currently predict a recession or an inflationary environment that would require the Fed to quickly raise rates. This does NOT mean valuations are at relative discounts—low rates are pushing some investors to equities, and areas such as utilities will be the first to sell off as rates move.

We’re seeing a lot of investment suggestions for private equity, private or second-market debt funds, real assets and options-hedged equity products. All are expected to provide better risk-adjusted returns than conventional stocks and bond portfolios. Our evidence doesn’t support many of these ideas. As we learned eight years ago, and can see in the table above, the traditional relationships between stocks and bonds provides the insurance and low correlation we need. In times of crisis, U.S. Treasurys and public-market liquidity (such as U.S. large-cap equities) are the prized investments.

Our clients know, too, that we preach diversification, patience and a focus on the far horizon, not the next step. The market data we review indicate that the U.S. economy is still healthy (but not robust), and few signs of the high rates, high inflation, excessive stock valuations or a recession are present. We expect some volatility in the period ahead, but our long-term growth outlook remains positive.