What is Going On?

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