Serenity Now

Serenity Now! It’s a phrase that Seinfeld’s Frank Costanza latched on to thanks to his physician. As he so eloquently frames it, his “Doctor gave me a relaxation cassette. When my blood pressure gets too high, the man on the tape tells me to say, ‘Serenity now!‘”

“Medical advice” aside, investors have just been given a ring-side seat to a ten percent correction in the S&P 500 Index. Volatility unexpectedly engulfed trading, with the S&P 500 moving into correction territory just nine trading days after closing at an all-time high.

That’s a record, according to LPL Financial Research.

Putting aside Frank Costanza’s questionable medical advice, corrections and volatility are a normal part of the investing landscape. The period of relative tranquility, which began in the summer of 2016, is not. It’s profitable for an investor that is well-diversified, but it can’t be expected to continue forever.

Where to from here? I won’t try to time the market. No one can consistently time the market.

What I can say: A well-crafted financial plan that is uniquely crafted with your financial goals and risk tolerance levels in mind is the best place to begin. Don’t have a plan? A well-regarded financial advisor can assist.

Diversification cannot eliminate risk, but it can help mitigate it.

Advisors who take a long-term view and regularly communicate with their clients have been emphasizing the importance of the strong fundamentals but have also been subtly cautioning clients that market volatility would eventually resurface. Timing it, however, is almost next to impossible.

Resist the temptation to make emotional decisions. Making buy or sell decisions based solely on market swings are rarely optimal for long-term investors. That’s where the financial plan provides guidance.

It’s time for a gut check. Well-diversified portfolios heavily skewed to stocks can provide stronger long-term gains, but they come with more risk and greater price swings.

Can you handle the added risk? Has the selloff left you overly anxious? If so, revisit the plan with your financial advisor.

Corrections are never fun. For some, they feel like the end of the world. Historically, however, stocks have a longer-term upward bias.

A long-term perspective and a well-crafted financial plan that takes unexpected bumps in the road into account is a much better approach than Frank’s ill-advised advice.

Fear-Emotions

Fundamentals, Fear, and Emotions

The fundamentals really do matter…. until fear and emotions take charge.

  1. The economy is expanding at a solid pace; recent data have been strong.
  2. Q4 profits have been very upbeat and the 2018 outlook is very rosy.
  3. Inflation is low.
  4. Interest rates have been creeping higher but remain at a historical low level.

It’s a perfect confluence of bullish events and investors have been pricing in perfection, or something darn near perfection. This makes the market vulnerable to a selloff when the narrative doesn’t play out according to the script.

So what happens when inflation expectations begin to creep higher and faster growth spooks Treasuries? Investors begin to price in the new information. Given the sharp run-up in shares over the last year, the reaction can be swift.

It’s a “shoot first, don’t ask questions, and shoot anyone who does” mentality—that in large part, may be driven by technical factors and trading programs. Or, as Josh Brown states in his blog, “Some people are selling because they aren’t people at all, but software programs that have been programmed to sell when others are selling.”

The fundamentals really do matter…but not today.

Good news is good news… until it’s bad news Recall the 1980s and 1990s, when strong economic news lifted rate hike expectations, and, at times, created a stiffer tailwind for equities.

For example, 1994 produced great economic news, and the Fed reacted by sharply lifting interest rates. The bond market was hit hard; yet, the S&P 500 never corrected by 10%.

We haven’t seen that in this expansion, i.e., good economic news has been a positive catalyst for stocks. Though I’m not willing to commit at this time, it’s possible the pendulum is beginning to shift.

Back to the fundamentals While the fundamentals didn’t matter today, they are critical medium-term supports to the market. It’s something we’ve seen since the bull began.

Yesterday’s selloff – 1,175 points is an attention grabber. Still, it’s not in the top 20 largest percentage losses.

We knew volatility would eventually return; timing, however, was virtually impossible.

But, and this is big, we’re not seeing shares selloff because of cracks in the credit markets, weak economic data, global central banks signaling much tighter policy, reduced profit forecasts, etc. It’s not a macroeconomic event.

Selloffs like these wipe the euphoria and froth out of the market and are healthy in the context of a growing economy. It’s like taking nasty medicine. Yuck! But it cures what ails you.

No one knows when we’ll bottom – maybe today, maybe after the S&P 500 officially moves into correction territory.

We’ve seen volatility before. Recall the 11% drop in the S&P 500 in just five days during Aug 2015, or the quick decline following Brexit.

But shares recovered.

Bear markets typically correlate closely with recessions. Short term, the data are not signaling a recession.