Volatile. When asked to describe Monday's market action with one word, that is the only word that you need. The Merriam-Webster dictionary defines volatile three ways.
Volatile, adjective | vol - a - tile | 1) likely to change in a very sudden or extreme way, 2) having or showing extreme or sudden changes of emotion, 3) likely to become dangerous or out of control
All three of those definitions fit the Dow Jones Industrial Average's (DJIA) behavior on Monday to a "T". Likely to change in a very sudden or extreme way - Within the first five minutes of trading on Monday morning the DJIA was down over 1,050 points. From there it rallied over 950 points and then turned south again to close down 588.40 or -3.57% for the day. The changes were definitely sudden and extreme! Having or showing extreme or sudden changes of emotion - While the stock market is not a person and therefore cannot exhibit emotions, it is pretty safe to assume that Monday's wild price swings caused many investors to experience extreme and sudden change of emotions. The talking heads on TV and on Twitter were constantly asking questions like: Will the market close down 1,200 points? Will the market only close down 100 points? Will the market make it all the way back and close up for the day? These so called experts on television love to see wild swings in the stock market because more people will tune in and their networks will collect more advertising dollars. Remember, the financial news channels are not there to primarily help you with your investments. They are there to make you want to stay tuned for the next salacious story. Likely to become dangerous or out of control - Is this the start of a bear market? I know that many of you were probably asking yourself that very question. While we can't know the answer to that question for sure, the indicators that I look at on a daily basis are not telling me that this is the start of the next structural bear market.
U.S. Stocks are still the number one ranked asset class of the six macro asset classes that I evaluate. As a comparison, I took a look back at what my indicators were saying in August 2008; prior to the Financial Crisis and Meltdown at the end of September 2008. The major difference that I see between the indicators now and then is the ranking of cash or money market relative to the other asset classes. Back in 2008, defensive asset classes like Cash and Currencies were ranked one and two. Conversely, U.S. Equities were then ranked near the bottom at number five. Fast forward to today. While bonds are a defensive asset class and are currently ranked number two, the number one ranked asset class as I stated previously is U.S. Stocks. Until U.S. Stocks relinquish their hold on the top spot, I recommend not doing anything in spite of the recent market volatility. At the beginning of August, International Stocks deteriorated enough relative to Bonds to facilitate the adjustment of our portfolios. Bond allocations were increased and International Stock allocations were decreased well in advance of this latest market turmoil.
At this point I am sure you know what I am about to say - Please do not panic. Please resist the urge to sell your stocks. Take a step back and tune out all of the noise that is trying to convince you to do otherwise. The end of summer is rapidly approaching. Wouldn't you rather focus on enjoying the beautiful weather with family and friends? Go out and enjoy it! Rest assured that I am here and remain ever vigilant for changes that will warrant our attention.