Wow! What a terrible week in the market! I would be the first to admit that I hate weeks like this . . . they stink! That said, they have to happen. It’s how the market works. The market cannot go up every week, every month, every year. A normal market has what’s called “corrections.” They are 10% pullbacks before the trend keeps moving upward . . . that’s most likely what we’re seeing now.
We don’t need to re-hash what happened this week. All of you know that market was blasted 6% (down 7% off the all time high). Let’s discuss why it was down and what we’re thinking going forward.
Reasons why the market was down.
- Interest Rates. The Fed minutes came out this week and pointed to a likely interest rate hike this year, possibly (and most likely) in September. Interest rates have been historically low for a historically long time. The Fed raising them is not a negative thing! It shows the economy is improving as we all hoped it would. This week we created a short (8 min.) video that discusses 3 things you need to know as interest rates rise. I would urge you all to watch it. The first thing discussed in that video is happening this week, volatility. The market is already pricing in a rate hike. That volatility is happening now. However, the #2 and #3 things are the more important items in that video. You can watch it by clicking here.
- China. A Chinese economic slow down is the other major reason why the market pulled back this week. This is crazy! We’ve known for six plus months that the Chinese economy was slowing down. I would reference an old blog post that discusses our thoughts on China. You can read it by clicking here.
- Its’ that time of year! For those that have been listening to our market commentary videos you will recall that May – October is the worst six months of the market historically. We expect volatility to increase and returns to be slightly positive or even down. November – April is typically the most bullish time of the year (the S&P 500 typically averages 7% during this time frame).
Before we address what we’re thinking going forward I would add one more thing . . .
People are too focused on 2008’s bear market. Lots of people lost a lot of money during 2007/2008 and as a result they are scarred. That pain is still fresh and when market volatility occurs that recent pain is too much to bear. They immediately think the worst and so they want to sell everything and get out of the market. It’s called “recency bias” and it can have a negative impact on portfolios over the long term as people tend to buy and sell at exactly the wrong time.
What are we thinking going forward? Here are our thoughts in no particular order.
- We do not invest for three months or six months. We invest for the next 2 plus years. Most of you have 5, 10, 20, 30, 40, 50 years worth of life left. We cannot and will not abandon long term plans because of one week or one months worth of market movement. We’re still optimistic that we will finish the year positive.
- This is not 2008. We do not feel like this is reminiscent of 2008. There are plenty of positives happening in the market including:
- Unemployment is at 5.3%, (cut in 1/2 from its high)
- GDP continues its positive trend (no recession in sight)
- The housing market continues to improve. No where near its 2008 highs (thank goodness) but still continues to improve quarter to quarter.
- Private companies have better balance sheets and more cash than arguably any time in history.
- Our options strategies have been working. For those clients with TD Ameritrade accounts we have been selling vertical spreads and iron condors over the past three months. Those spreads have been working terrific as the income from selling them has reduced portfolio volatility. It’s called our Alpha Strategy.
- This could be a terrific buying opportunity. Below is a picture of the S&P 500 and the Volatility Index (VIX). To put it simply, the VIX is an investor fear gauge. It’s contrarian to the market . . . when the market is moving higher the VIX (fear) heads lower. When the market falls (like this week), the VIX (fear) normally spikes higher. When the VIX spikes higher it typically doesn’t stay high too long. We like to keep an eye on the 20 level (red line) on the VIX. When it pops above 20 it has been a good buying opportunity. The last real good buying opportunity we had was back in October of 2014. We’re near that same level now.
- Lastly, I will lean on Sir John Templeton with the saying of the day. He said “Bull-market are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” We are a long ways away from “euphoria” and probably “optimism” as well!
In summary, please understand that we are constantly monitoring portfolio’s, including risk, daily. Although we know weeks like this must happen, we still hate when they do. We hate it because we know that our clients have to deal with the “red” in their accounts. That is why we are writing this blog post . . . to provide clarity and help you understand what we’re thinking going forward. Our success is helping you accomplish your financial goals. We will continue to do what’s right for the individual client and we will not let a 5 day or 5 month bearish move destroy a 5, 10 or 30 year plan.
If you have any questions or concerns please let us know. Just pop us an email and lets chat.
Brian Hunsaker, firstname.lastname@example.org
Brett Pattison, email@example.com
Here’s the short 8 minute video “Three things to know when interest rates move higher”