As the markets continue their volatility, we are producing more commentary for you, our clients and friends, to read. Reports like these from our investment team are a weekly staple at Sound. Yet, in more normal times we try not to inundate you with articles.
When you think of the markets and your account, we ask you to turn your attention to your long-term goals and plans. The stock market as a true benchmark is a bad idea. Because your personal financial plans typically do not hinge on the stock market. Certainly, there is the hyper-extreme fear that “everything goes to zero and we lose it all”. While that is technically a possibility, it is not a likely reality. What is more likely is that markets will cycle in and out of growth and loss periods. How we respond is most important.
As an investor, focus on your true financial plans and purpose. If you are retired, how are you enjoying retirement and being purposeful in this time? If you are growing money, planning for the future, when is that future and how are you preparing for that in all ways?
At Sound, we will focus on helping you execute your financial plans and purpose, along with managing your investments following a rules-based methodology. Our job for you is to continue to research and test your investment models, follow our decision-making process, and work within the markets we have. We will do this with discipline and service towards you.
Therefore, you may see investment changes in your account this week of October 29, 2018. Our Rules are signaling a change in many of your accounts. If you have questions, please feel free to call your adviser.
We are here to serve you!
The following is a market update from our investment team. You will see our ongoing thoughts and study of what is taking place in the markets:
From our Investment Team:
“The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.” – Seth Klarman
In history, we see parallels between the 2000 time period and the present. During the technology bubble, we witnessed valuations stretching, growth outpacing value by a wide margin, and the market peaking prior to the economy. In fact, the stock market peaked in September of 2000, several months before the start of the recession. The market fell from a high of 1520 in September to 1241 by the official start of the recession in March of 2001.
The recession in 2001 lasted from March until November 2001. The S&P 500 dropped from the peak in September of 2000 by about 25 percent by the end of the recession. The Nasdaq 100 dropped about 61 percent over the same time period. The scary thing is that the Nasdaq 100 had dropped approximately 52 percent prior to the beginning of the recession (18 percent for the S&P 500). From November 30, 2001, the S&P 500 lost almost 30 percent and the Nasdaq 100 lost almost 50 percent.
The point is that the economy does not need to be in a recession for the stock market to experience major losses. That is why our framework includes economic growth as only one of the four components of our discipline. The other three are Fed policy, market trends, and valuations. Economic growth is still positive in the US while Fed policy, market trends, and valuations are all negative headwinds.
Valuations are as high in some cases, and even higher in others, as the readings that occurred during the stock market highs reached during the 2000 time period. The Fed is tightening policy systematically and looks set to continue this path despite criticism from market watchers and the US President. Market trends have recently turned negative in the US, confirming the negative trends witnessed in global markets. Furthermore, the economic growth that we are celebrating in the US looks set to slow in the coming quarters. The environment is currently negative for risk taking.
There is hope that economic growth can continue to accelerate. There is hope that a short-term oversold bounce in US and global markets can turn into a larger rally that returns markets to positive trends. There is hope that the US Federal Reserve can press the pause button on the tightening path. Unfortunately, hope is not an investment strategy and we must follow the framework.
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Posted on Tue, October 30, 2018
by Sound Financial