Since its March 2009 low, the U.S. equity market, as measured by the S&P 500, has gained around 170%. There hasn’t been a “correction” (defined as a 10% downturn) in over 31 months (we have one every 18 months on average). It looked like we might see a correction in October, but it came up just shy. The S&P 500 dropped 9.85% between the intra-day high of 2019 on September 19th and the intra-day low of 1820 on October 15th. Since then, both the Dow-Jones Industrial Average and the S&P 500 have recovered the loss and, as of this writing, reached new all-time highs. However, it is interesting to note that, despite the market’s strong advance, the S&P 500 has yet to break above its 2000 peak on an inflation-adjusted basis.
There are many different opinions about the direction of the economy and markets. Some “experts” feel that U.S. stocks are currently over-valued; however, when considered in the context of the low interest rate/low inflation environment in which we’ve been for some time, others argue that history suggests not. Many people have been waiting for interest rates to rise from these historically low levels, thinking yields would begin to rise when the Federal Reserve ends their bond purchasing program that was implemented to help keep rates low. Well, they announced the termination of the program in October and rates fell. Interestingly, we almost simultaneously found out that U.S. banks were increasing their purchases of U.S. Treasuries at a rapid rate in order to satisfy a new liquidity test. Hmm.
Over the month of October, we had an almost perfect storm of events that has led to the mid-month rout. From headline-generating concerns about the seeming lack of success of the bombing campaign against ISIS to fears of an Ebola breakout here in the U.S., poor economic forecasts from Europe, sanctions against Russia, and the concerns about the Federal Reserve’s ability to successfully manage the next phase of monetary policy. Still, the market has proved resilient and now we are entering into the seasonal period (November to May) along with the period of the four-year Presidential Cycle where equities have historically had their best results.
We find all of this leaves many folks feeling that they are faced with two extreme choices: go to or stay in cash and wait for a market crash or correction and then go all in at the bottom or else ride this bull with both feet in the stirrups, planning to jump off before it rolls over, no matter how quickly that may happen. Of course, neither of these choices are really attractive options.
Tops and bottoms are only obvious in the rearview mirror. Some folks may feel they can time the market, but in my 27 years I don’t know anyone who has done it more than once and turned it into a process. The financial markets are complex adaptive systemsin which a large number of mutually independent but interacting people and institutions adapt continuously by learning from each experience. It is irrational to conclude your perception is 100% on target when someone is almost always willing to buy at the same time you wish to sell and vice-versa. The reality is that this market advance may end tomorrow or in five years.
Our approach is and has always been to do things in measure. We do not place large or concentrated bets which could have severe consequences on your financial future. Today we see both threats and opportunities/pros and cons. Therefore, we will continue with our discipline asset and strategy diversification approach for the purpose of taking acceptable risks that we believe offers the best probability of you reaching your goals. We are grateful for the opportunity to serve you and will continue to focus on implementing investment strategies that we feel make the most sense for the long run. Thank you for your trust and confidence and please don’t hesitate to contact us with your thoughts and/or questions.