What's Goin' On?
Market returns are a function of the investing public's perception of the economic future. So who is responsible and just what has been going on over that last week that may cause this great ride that we’ve been on over the last year or so to reach the end -- maybe?
The Fed -- who is largely responsible for what actually occurs economically to some degree has indicated they intend to raise interest rates, perhaps three times over the next twelve months. Rising interest rates or better said the expectation of rising interest rates is generally not a good sign for stock prices. Add to that, last week saw some very positive employment numbers and wage increases. That also tends to predict an increase in inflation. When the Fed sees inflation on the horizon they tend to put their hands on the interest rate throttle - meaning higher interest rates which, over time "may" dampen economic activity -- maybe (notice the hedging statement).
Is this the beginning of a bear market (definition of one is a drop of 20% or more)? I don’t know neither does anyone else. However, our clients should be well aware of our disciplined and systematic rebalancing that we apply to our portfolios. That means, that we are taking some of the appreciating or already appreciated assets off the table by selling them and reinvesting the proceeds in those asset classes that were not performing nearly as well, such as fixed income -- basically selling what is “high” and buying what is “low.”
In the past I’ve made the comparison of down markets to that of an airplane hitting turbulence. It's never a pleasant experience and those who don't fly often are either very uncomfortable during the turbulence or in a "white knuckle" panic praying for it to just end. Meanwhile, up in the cockpit the pilots are relaxed and letting the plane fly on autopilot while they enjoy some nice conversation. As long as you don't see the pupils of the aircrew dilating or hear panic in one of the pilot's voices when they tell you to return to your seat and buckle your seat belt nothing traumatic is going to happen.
The fact that you know on an intellectual level that the plane is built to absorb far worse turbulence than you're likely experiencing, doesn't mean on an emotional level those knuckles haven't turned white.
The investment markets are the same. As a coach who talks about and studies markets daily I am used to this. I know that a well diversified, constructed and managed portfolio, like today's planes, is built to survive these events -- over time. So this is all part of the investment process. Neither good nor bad markets are forever.
As I've said on many occasions, the price we pay for the long-term stock market returns is the volatility that goes with them. What people emotionally want to receive are stock market returns with savings account type risk. Unfortunately, that just doesn't exist. So along with the good times -- which far outweigh the bad -- this is just may be one of those turbulent periods we have to travel through as part of the investment process. As to if and how long this is likely to continue, who knows? If anyone says they do they're either ignorant or deliberately lying. This is information that nobody has at their dispense.
I recognize in spite of my classes and all that I have written you may still have some concern, so I want you to know that I am available to you at any time. I don't want anyone losing sleep over his or her investments. If you feel the need to seek any reassurance or just to vent your fears or discomfort, please pick up the phone and call me either on my office or cell phone. I am used to this and I will be happy to share my experience and counsel with you. The same goes if you wish to come into the office to just sit down and talk.
Thanks to Fredrick C. Taylor, an associate and friend, for his perspective and insight on this article!