Newsletter: October 2015

02
Oct

Newsletter: October 2015

No reason to mince words – the 3rd quarter market and client account returns were ugly.  In fact, it was the worst quarter we have experienced since the nasty selloff in 2011.

So, this market action begs a few big questions for us to ponder – they are:

  • Is the recent negative market action a precursor to something worse coming right around the corner?
  • Are we headed into or already in a bear market?
  • Is the market selloff signaling an oncoming recession?
  • Is this just another painful but temporary decline, or are we headed for another 2008-2009 meltdown?
  • Has the fundamental nature or character of the markets changed?

 

Normally, large and extended market downturns are preceded by heightened market volatility.  Market volatility has been off the charts with inter- and intraday swings of 1-3% becoming commonplace.  It is obvious the markets have no minute-to-minute or day-to-day memory.  The good news is that two-thirds of the time the markets stabilize after these spasmodic bouts of volatility.  Worse market declines follow periods of heightened volatility only one-third of the time.  In other words, based on history, we have favorable odds (two-thirds) that the market will stabilize in the 4th quarter.

We may not be in the grips of a bear market – but it sure feels like one.  According to S&P Capital IQ, the 253 stocks that make up the S&P 500 (over 50% of the index) have suffered +20% declines from their June highs.  121 stocks or about 25% of this index are down over 30%.  And all but 70 stocks (430 total) are off more than 10%.  Traditional safe havens such as Utilities, REITs, Value Stocks, and Dividend Payers have slid 10%-15% YTD.  Commodities and Emerging Market Stocks have been decimated.  

Bottom-Line:  There have been few places to hide. 

The recent news from Volkswagen and fear of the world’s largest commodities trader Glencore collapsing does little to inspire confidence.  Obviously, there seems to be rampant and seemingly unrelenting uncertainty in almost every corner of the globe.

But, before we get too negative, there are a few positive takeaways.  First, we experienced similar steep and nasty market declines (-10 to -20%) in 2010, 2011, and 2012.  In each case, the market staged a bounce-back rally, taking between 66 and 108 days to recover to new highs.  Especially painful was the 2011 selloff, when elected officials were threatening to shut down our government.  To us, this feels more like 2011 than the 2008-2009 period.  Maybe it is more akin to October 1998 when market participants panicked over the potential financial impact of the collapse of Long Term Capital or 1999 when we faced the Asian Currency Crisis.

The five key strategists with excellent long-term track records are split evenly on their outlook for the economy and the markets.  Two believe something has fundamentally changed in the market’s foundation and have dramatically reduced their market exposure, while two are not willing to “throw in the towel” believing this ugly period will pass.  One is maintaining a neutral stance towards the markets.

Another positive sign is that so many people are “so” negative.  Listening to talking TV bobble-heads over the past two months we rarely hear bullish commentary.  In addition, the Investors Intelligence Weekly Survey reported that only 24% of market participants are bullish – the lowest % since the market low in 2009.  The two key investor psychology gauges we closely monitor (CNN’s Fear vs. Greed Index and Citi Group’s Panic/Euphoria Model) are stuck in the 96thpercentile of the panic/fear mode.  Anything over 90% is considered extreme.  Readings this extreme have resulted in positive markets one year out 95% of the time.  Remember, the market does its best to make the consensus look really bad and stupid.

There are several things we would like to see to provide a little more comfort.  First, volatility levels need to come down.  The roller-coaster 100+ point Dow sings within minutes creates a tremendous amount of investor anxiety.  Second, we wish the various FED governors would stop their differing non-stop chatter about the time and degree of interest rate hikes.  And FED chairperson Janet Yellen needs to clarify her message so ambiguity is reduced.  Third, we would like to see sellers of stocks exhaust themselves.  Once the sellers are flushed out it takes very little good news to ignite a rally.  Fourth, we wish certain members of Congress would stop their government shutdown threats.  Fifth, a strengthening of commodity prices and better (or just less negative) economic news out of China would go a long way to quell global economic fears.  And finally, how about some positive 3rd quarter earnings surprises?  This alone could provide some much needed market support.

Any improvements in our wish list would do a lot to reduce the current uncertainty.  The probabilities of a 4th quarter rebound will improve significantly if any or part of the above wishes come true.  Again, given the negative backdrop, it will not take much to reverse the current market slide and feelings of investor despair.  In the meantime, we are upgrading our portfolio holdings and hoping the market index lows of August/September will hold.  Everyone (including us) is always looking for the market “holy grail” – that is, a simple market signal that clearly identifies market tops and bottoms – i.e. the exact point in time to buy and sell.  Unfortunately, there is no such grail.  You have to take in as much info as you can, and make your best educated guess on what the future holds.

Our best advice is to fasten your seatbelts and not let the day-to-day volatility unnerve you.

As always, feel free to contact us any time to review your overall situation and particular needs.  We offer both portfolio management and financial planning (plus good old fashioned general advice) as part of our basket of client services.

If you would like to inform us of any updated contact information, please let us know as well.

Thank you,

Doug, Victoria, Ross, Patrick, Randall, and Colin