Month: December 2018

It goes without saying, but we are currently in the midst of a massive selloff.  It’s close to the worst December in more than 85 years (on average, a stronger month for stocks).  The S&P 500 went from an all-time high to a 52-week low in 59 trading days.  The Nasdaq 100 just had its worst week since 2008, and it was the worst Christmas Eve ever.

While the overall magnitude of the decline hasn’t been historic (quite average actually), it’s been the speed of the decline that’s causing the most angst, prompting the blaming of computers and algorithmic trading programs.  For those of you who haven’t heard this excuse before, computer trading was also blamed for the Black Tuesday stock market crash of 1987.  This event left a generation of investors (and advisors) with PTSD, while the luckiest few who managed to sidestep the crash with enough hubris to last a lifetime.

The Headwinds…

• Rising Interest Rates and Quantitative Tightening (QT)
• Slowing Growth in China and Europe
• Algorithmic-driven “fire sale” in equities and credit markets
• Inverted Yield Curves
• Brexit

The Tailwinds

• Cheaper Oil
• Trade War Pause
• 2019 Earnings Growth
• Historically Low US Unemployment
• Health of the Consumer (retail sales)

At the moment, we’re the in the middle of these two forces.  A tornado trying to predict whether the economy goes into recession or resumes the solid economic growth we’ve seen over the past several years.

No one knows.  And let’s something else out of the way as well.  The answer to the question is “Yes”.  The market can always go lower, and please don’t ever forget this.  Investment accounts are not savings accounts.

Making predictions never goes well, but in my opinion, the most likely scenario moving forward is that there is a stellar 8-10% short-covering rally (we saw a good portion of this move yesterday), which would allow long-term investors to take a deep breath.  If this scenario plays out, don’t be fooled, until the S&P 500 trades above 2600, the primary trend will remain down and all rallies should be taken with a grain of salt.

Yesterday’s rally (and hopefully subsequent ones ahead) is the reason why we prefer staying fully invested.  Systematic rebalancing locks in the certainty that you will partake in these gains, but unfortunately the cost for doing so is muddling through the times that aren’t so fun.

As Jim O’Shaughnessy puts it, “corrections and bear markets are a feature, not a bug of the stock market.  Without them there would be no equity risk premium.”  So, if you’re trading at home, be careful.  It is chewing up even the most seasoned professionals as they attempt to navigate the quickest trend changes in history.  February saw the fastest ever 10% decline from an all-time high, which was then subsequently followed by NEW all-time highs later in 2018, which was then subsequently followed by…well, you get the idea.

If you’re an investor, be patient.  Fantastic investment opportunities are beginning to present themselves.  If you’re fully invested, let the rebalancing do its job and start bringing you out of your bond allocation into a bit more equities.  If you have additional capital to deploy, it is a great time to start nibbling (but not all at once).  If you’re still actively making retirement contributions, these are the most important ones you will make as they become the backbone for future growth and, more importantly, exhibit the requisite faith in your strategy.  In all likelihood, in 12-18 months you won’t even remember how you felt during these times.  But you can be sure I’ll remind you about it…

— Adam

As my wife was reading my latest post, commenting on how I sound like Suze Orman (who is now retired and living the Bahamas, btw), I was looking ahead at the next few days on what will be a bit of a hectic personal schedule.  Three Christmases with two children under seven means lots of family time.  But the next couple days before we get fully into the Christmas swing will be busy for a different reason.  We’ve had three deaths affect our family over the last week.  My stepfather’s brother (cancer), a good friend’s father (in poor health for some time), and a classmate of my first-grade son (accidental gunshot).  I’m old enough now to realize these moments tend to dart in an out of our lives, just long enough to remind us of our mortality and then eventually wither back into the noise of everyday life.  Of course, we eventually settle back in and move on, but as I get older, they stay with me a bit longer.  Perhaps because of the ever closing window of my own life.  Or perhaps, because in order to look back and fondly recall memories, we better get busy making them.

Financial health should be the battery power for making these memories, not for status or self-esteem.  There is more to life than bull and bear markets.  Time is our most finite resource.  Just a quick reminder to hug a little tighter this holiday season.

– Adam

This morning, Brad and I were discussing the comments made yesterday by Jeff Gundlach (“The Bond King”), specifically as they related to passive investing (we may address this misnomer in a future post).  Gundlach said that passive investing has reached “mania status” and will exacerbate problems in the market because it’s hurting behavior.  Our clients each have a clear plan of where Brad and I want to go with their account (even if some of them aren’t fully aware).  Theoretically, if we stick to these plans, this shouldn’t apply as much to them (the best laid plans…).  But certainly for those of you without an anchor you should get one.

This got us thinking a bit more.  Shouldn’t the idea of passive investing (indexing), those people in it for the long-term, be much stronger holders of equities than most?  Vanguard tells us that their index fund assets account for only 10% of the total global investable market and 5% of trading volume on U.S. exchanges, so it shouldn’t be a issue of indexing becoming too large to sway the natural buying and selling.  Perhaps, it’s the fact that sentiment traders and active managers (speculators), since the beginning of the stock market have relied upon people’s fear and greed as contrarian indicators.  We’ve heard a lot about the term “capitulation” recently, and you’ll hear it more on the financial news in the coming days and weeks.  Capitulation is an emotion we’ve all felt.  I like to think of it as the moment where you throw your hands up in the air and say “Enough!”.  For investing, this is the moment when you decide you want to deviate from your plan because you become consumed by risk aversion (even though data would point you elsewhere).  After all, Warren Buffett is famous for saying “be fearful when others are greedy and be greedy when others are fearful”.  Clearly we know what type of environment the current market finds itself in, but we also know, buying the stock market at this level feels a bit like catching a falling knife.  Well, I was interested in waiting until the market came down, but now it’s come down so far, so fast…perhaps I should wait a bit longer.

The arbitraging of human emotion will always and forever be our greatest tool against poor investing.  Our own fears and greed rely upon irrationality and imperfection to creep into our mind (and not just as it relates to investing).  When we take on new clients, generally early in the behavioral education process, some investors feel they should be robotic, attempt to rid themselves of these basic human emotions, but we’re not so sure that’s possible.  I wouldn’t consider myself an emotionally volatile person, but the roller coaster of day-to-day market volatility still hits me from time to time.  That being said, what can we do to help.

1.  Education – Read.  If you don’t have time, find a trustworthy financial professional who has enough time to get you up to speed.  FInancial education is applicable in every walk of life, and sometimes delegating is an incredible hurdle, one that some people never make it over.

2.  Self-Awareness – Feeling those emotions of fear and greed are not only inevitable, but healthy.  How you react to them determines everything.  Because you have the ability to think about thinking, you can use your emotions to enhance your chances of realizing your investment goals.  I’m not talking about outsmarting the market here (unlikely), I’m talking about outsmarting yourself.

3.  Long-term Thinking – We have no connection to our future selves, and no comprehension of saving a $1 today to turn it into $10 in 35 years (it’s about a 7% compound growth rate).  Sticking to one strategy, being responsible about debt, and saving more than we spend (gasp), are much more important for your overall financial health than the incremental difference between your asset allocation and the optimal flavor of the month.

If you don’t have a plan, get one.  If you have a plan and don’t understand it, have your advisor explain it to you.  If you have a great plan, go over it again and trust.  Times like these are when the rubber meets the road and some of the toughest you’ll face along the journey.  It’s time to learn now, so you’ll be prepared.  Your future self will thank you.

– Adam

If you’re watching the stock market everyday like Brad and me, you should first have your head examined, and if you weren’t lucky enough to catch the back and forth market action, let me give you the play-by-play.  

Monday – Coming off last week’s “snapback” rally, we continued to move higher on reports of the “trade truce” agreed to by President Trump and President Xi Jinping of China.  The second of the two major problems hanging over the market was moving in the right direction.  President Trump backed off the most stringent of tariff increases and agreed to accelerate talks for the next 90 days in the hopes of getting a deal done.  Perhaps there would be a Santa Claus rally this year, and with any luck, new all time highs might be around the corner.  The Dow Jones opened up 450 points higher, but closed the day up around 300 points.  The rally didn’t hold, but still a good day up over 1%…

Tuesday – The optimism quickly turned to outright hatred as the market had yet to hear China’s side of the negotiations.  They had not yet arrived back from the G-20 summit to speak to Chinese media, and regardless of where you fall on the political spectrum, sometimes President Trump says things that aren’t entirely accurate.   The reality set in that a 90-day ceasefire is not even close to being enough to change the long-term behavior of CEOs looking to make capital allocations or wealth managers looking to change asset allocations.  Perhaps this was simply a stall tactic from the political administration?!?  The Dow Jones ended up dropping almost 3%, its worst day since October 10th.  But we were up almost 1700 points last week, we only gave back about half…

Wednesday – Markets were closed Wednesday, but with the algorithms detecting the negative sentiment in Tuesday’s market (possibly from the lack of trading that day, and not being programmed to recognize an unscheduled off day in the markets), on Wednesday night, the futures market reopened, and the S&P 500 fell 65 S&P points in 10 minutes (equivalent to approximately 600 Dow Jones points).  Oh boy,  Thursday is gonna be a doozie.

Thursday – While the computers managed to rallied the S&P back to only down 25 before the market opened, the sour mood continued and the Dow Jones fell another 800 points, intraday, before magically changing course mid-morning to close down only 79 points on the day.  Phew…could an intermediate bottom be in?  The television was asking people if this was an “all clear”.

Friday –  The rally from Thursday continued at the open with Dow Jones climbing 100 points, only to again reach a technical level and start giving back some of its gain.  As the day continued, the markets continued to lose steam, only to close down another 558 points.  This market is untradeable and uninvestable!  I’m so glad the week is over.

If any of these events affect the viability of your current retirement/income/growth strategy, you’re doing it wrong.  If you’ve been sitting on cash and have been hesitant in recent months (years?) about adding to a market that was too expensive, now is your chance (but what if it keeps going lower?).   If you’re starting to think it’s a possibility you are NOT the next Warren Buffett, and would like another perspective, now is the time to start that search, not 10% lower on the stock market.  

I’m always looking for simple ways to relate the stock market to everyday examples, but the best one I’ve read in a long time was last week.  It was a blog post (The Reformed Broker) from Josh Brown at Ritholz Wealth Management, and the metaphor goes on to talk about how the economy is like someone walking their Jack Russell terrier.  The dog walker is the economy, strolling along relatively consistently, stopping infrequently, with most passerbys paying little attention.  What most people notice is the twitchy, spastic animal on the end of the leash (the stock market).  The dog is distracted by everything, stopping to stiff every tree and flower in its path.  Let’s keep our eyes toward the future and let that dictate our investment strategies, not the Jack Russell terrier nipping at our heels.

– Adam