Halloween has arrived early! You would think this if the recent stock market action was any indication of such.
It is entirely normal to have a reaction to yesterday's stock market drop - probably a very, very strong reaction. It is human nature. We are wired to do so. There really is nothing you can do about preventing that reaction. I can tell you though, what you are experiencing has everything to do with feelings and nothing to do with thinking.
If you have ever taken a course in Psychology, you probably learned about the Fight-or-Flight Response. The term "fight-or-flight" represents the choices that our ancient ancestors had when faced with an imminent danger in their environment. They could either stay and fight or run away. In either case, the physiological and psychological response to this stress prepares the body to react to the danger. So why does a bad day in the stock market trigger a stone-aged response in our bodies. As I said before, it is just the way that we are wired. It is an automatic response and there is nothing that we can do to prevent it from happening.
Enough about feelings. Let's do some thinking. If we zoom out a little and take a look at what is really going on we note the following two facts: U.S. corporate earnings are surging, and the U.S. economy as a whole is also surging.
There is also much noise out there to trying to throw you off of your game. For example, this Fortune Magazine cover from a couple of months ago:
The article makes for a catchy cover story, and certainly entices people to buy the magazine. But it has the potential to seriously scare and mislead investors. Why? Because, as the author himself says, nobody, including most notably economists, has been able to accurately predict economic and market downturns. So, time and time again, market “timers” have gotten burned.
My view is that the strength in U.S. stocks can continue until the Federal Reserve makes a deliberate move to slow the economy. From every indication we have from the Fed, that is still a ways off. As you know, I do not care for predictions. I am a strong believer in "What is, is." And what is right now, is the fact that despite recent volatility, U.S. stocks continue to remain the strongest asset class of the six that I follow on a daily basis. Not cash. Not bonds. Not commodities. It is U.S. stocks. I remain vigilant every day for changes that are truly long-term in nature and will adjust our portfolios accordingly.
Investment success comes from ignoring the short-term noise and following a plan. Emotions can and will wreak havoc on your portfolio. I know that it is tough to do, but try to ignore the short-term market fluctuations that will severely tempt you to abandon your plan. There will be bad days for sure. Fight the urge to react to your feelings. Think instead. The prudent and best way to maximize long-term wealth-building is to stay fully-invested in a broadly diversified portfolio.
October is right around the corner. It's a time for World Series baseball, pumpkins, brilliant foliage, and stock market crashes. Wait? Stock market crashes? That's right. Some of the most notable stock market meltdowns have occurred, or escalated, in the month of October. These include 1978 (-9%), 1987 (-22%), and most recently, 2008 (-17%). October has also produced several of the largest one-day market declines. Black Monday (1987) and Black Tuesday (1929) both occurred in October.
Now I am not pointing this fact out to alarm you. Quite the contrary. I just want to put the current market environment into context for you, because I am sure that we will be inundated with a myriad of media reports about the coming stock market correction. You know, the one that is coming just because this bull market has been going on for so long now. Do not pay attention to those kind of stories!
Here's today's fun fact: Did you know that since 1950 the S&P 500 has had more double-digit gains in October than it has had double-digit losses? It's a fact. The month of October is also known as the "bear killer" because it marks the end of the seasonally weak period in the market. Historically speaking, October has been a positive month more often than it has not. The S&P 500 has actually finished higher in 60% of the Octobers between 1950 and 2017.
So while October may have a notoriously bad reputation, the histogram below shows us that maybe it is not well deserved. Each of the previous sixty-eight Octobers' returns have been placed into a performance bracket, allowing us not only to see that there have been more up Octobers than down Octobers, but also the degree to which they have been up or down. When you look at the far left of the histogram, you will notice that only four Octobers since 1950 have experienced a decline in excess of -5%. The most common experience in October has been a gain in the range of 2.5% - 5%.
(source: Dorsey, Wright and Associates, LLC)
While this is an interesting exercise to demonstrate what has happened in the past, it really does not tell us much about October 2018. What I do know is that currently my U.S. stock market indicators remain positive. U.S. Equities remain the top ranked asset class out of the six that I follow on a daily basis. There certainly could be some short-term market volatility as corporate earnings season will begin again in the next month or so. Also, increasing trade tensions and rising interest rates could impact market volatility. I remain vigilant and if US Equities begin to deteriorate relative to the other asset classes, portfolio allocations will be adjusted accordingly.
In the meantime, don't be spooked by dire warnings about the month of October and what it might mean for your investments. If the past is any indicator, then things will be OK.
I have often said that it is important to ignore the short-term "noise" so often heard in the markets. This noise emanates from the financial media as well as from some very highly paid professionals. (Please note: the size of one's paycheck does not signify brilliance.) While catching up on some reading over the weekend, I came across an article on MarketWatch titled, Chart of Shame: The S&P 500 vs Everyone Who Said the Market Was About to Crash. This article contained the following graphic compiled by Jon Boorman of Broadsword Capital.
Wow! This chart says it all. There are over 25 quotes from some highly paid and well respected stock market pundits from 2012-2018. All of them warning about an upcoming market crash that never materialized. Total and complete wrongness. I especially love the two "Sell everything!" directives in 2016. Since 2016, the S&P 500 has climbed an impressive 40%! If you had heeded their warnings and moved your money to cash, your investment portfolio and possibly your long-term financial goals would have taken a serious hit as you sat on the sidelines during this strong market rally.
The financial media's main mission is not to help you succeed as an investor, but instead to generate digital clicks or old-fashioned magazine sales. It's about them, not you. Sensational headlines like "The Big Crash is Coming!" sells many more magazines than a more useful headline such as "Everything is Fine. Stay the Course". Yes, I know that these headlines are usually backed up by some very credible sounding and well-researched rationale. However, the track record of these stock market pundits' predictions is horrendous.
Economist John Maynard Keynes famously said, "The only function of economic forecasting is to make astrology look respectable." Let's take a look at the accuracy of some of these so-called forecasting experts. The website Econlife.com provides a very telling report card on their past performance. When they looked at 12 month market predictions (i.e. what the "expert" thought the market would do over the next 12 months) made between 1998 and 2016, they found that 92% of the time the "market expert" predicted that the market would rise. The stock market has historically gone up more than it has gone down, so this was a pretty safe prediction from a probability standpoint. Not surprisingly, they were right 92% of the time. Most investors are more concerned about knowing ahead of time when the market is going to drop. So how did the "experts" do when it came to accurately predicting market downturns in the coming 12 months? Only 9% of the predictions accurately predicted the market downturn. Utterly worthless! Why would anyone ever listen to these people?
My portfolio methodology does not rely on forecasts. I think that we can clearly see that there is little benefit to listening to the well-paid "experts". Instead, I rely on a methodology that is based on the laws of supply and demand. We all understand why there are lemonade stands in the summer and hot chocolate stands in the winter. When there are more buyers than sellers willing to sell, prices must rise. When there are more sellers than buyers willing to buy, prices must fall. It's easy to follow the rules of a methodology when things are going well, but it's when the going gets rough that we need the rules the most. I don't listen to the "experts" who are telling us what the market should do. And either should you. I listen instead to what the market is saying. When U.S. stocks are no longer in demand, that is when I will know that it's time to alter our allocation or raise cash in our portfolios.
The more things change, the more things stay the same. Another week has passed and there were no major changes in the stock market. U.S. Equities continue to lead; with International Equities close behind. The strongest stock market sectors also continue to be Technology, Financials, and Industrials. Not much has changed in 2017.
So far this year, we have witnessed historically low levels of volatility. Perhaps the biggest story of 2017 is the complete and utter disregard that the U.S. stock market has shown for the myriad of major headline events that we have witnessed so far. There have been numerous natural disasters; even more saber rattlings from North Korea; and still more social media balloons floated by the White House. In the face of all this, the stock market has been given plenty of opportunities to implode, or at least display some sort of pronounced reaction. Instead......(insert the sound of crickets here) nothing! This extended period of low volatility is not often observed in the U.S. stock market and certainly has the pundits perplexed.
The S&P 500 Index has gained more than 13% this year. As I noted above, it has done so with an extremely quiet set of "ups and downs" that hasn't been experienced in over 40 years. Earlier this year, the S&P 500 index went 58 days without a single price change that was greater than +/- 1% of its previous day's closing price. We've now gone 232 trading days (almost a year) without a daily price move of more than +/- 2%. So, are we due for a 2% rise or fall? Not so fast. The longest period on record without a 2% change in daily price occurred from October 2003 through June 2006. This equated to 680 trading days. Through the first three quarters of 2017, only 8 days have experienced a price change of 1% or more. That means 96% of all trading days so far this year have finished with less than a 1% change from the day before. The historic average is 76%. Where is the volatility? While 2017 is not yet over, there has not been a year this "quiet" since 1972!
So why does this market feel so jittery when in fact it is not? I read recently an explanation as to why we may feel that this market is volatile even though in reality it has been uncharacteristically calm. When headlines remain vitriolic, it is far too easy for the typical investor to feel volatility that doesn't exist. This occurs in much the same way that a young NFL quarterback might feel a rush from the opposing defense that simply isn't there. A savvy defensive coordinator will often send just three rushers in an obvious blitz situation (3rd and long, for instance), begging an inexperienced passer to panic and throw the ball in the direction of any one of the eight defenders now waiting for their opportunity to run the other way with it. That's right! We are just imagining it! Our minds are being tricked by the constant headlines that are touting the next big scary thing. So turn off that TV and put down that newspaper. They are just making you feel market volatility that isn't there. This in turn, makes you loose faith in your investments.
In spite of all of the daily shocks that should be derailing this market, the 2017 stock market continues to calmly march forward. When my indicators tell me that this is no longer the case, our portfolios will adapt. Until then, we will stay the course and remain confident in the methodology.
Halloween has arrived early! You would think this if the recent stock market action was any indication of such.
It is entirely normal to have a reaction to yesterday's stock market drop - probably a very...