Dear Mr. Market:
Let’s get this part out of the way…You’ve made a lot of people ill the past few days. As a matter of fact you’re following through on staying true to form by making October another historically miserable month.
After a two day blood bath we’re seeing a little bounce leading into the weekend but the stock market basically negated what was a surprisingly pleasant summer stretch. We’re now sitting around July levels and the previous correction in February of this year is suddenly somewhat deja vu. What’s not much different is the fact that most financial advice remains the same : “Stay the course. Don’t panic” Diversify.”
What happens in September often follows through and even intensifies in October. That being said just because “X happened last time” doesn’t mean “Y will happen this time”. We believe there will be more anxiety than normal this time around. The stock market and it’s bull run are not only long in the tooth but we also have mid-term elections coming up which regardless of real substance…they will stir up emotions and uncertainty. If we get a “red wave” you’ll likely see the market advance even higher for a few months and if we get a “blue wave” it’s our opinion there will be a sell-off. This is not a political opinion on which party is “better” so please remain calm; it’s simply a fact that if we have a meaningful shift in power there will be political gridlock for a couple of years. Long story short…one result will cause increased volatility and in our opinion the other will lead to that long grinding slow down where we actually could see the stock market finally roll over and enter a new cycle.
So…”don’t panic”? Well….sort of.
We’re going to share some of that same counsel but with hopefully a bit more actionable advice; do something! Granted…sometimes “doing nothing is actually doing something” and can be the best course of action. In this case, however, we believe you need to prepare for a real panic moment but it won’t come for about another six months or so. We’re not saying that we suddenly acquired a crystal ball and see some sort of calamity coming; after all nobody can tell you that with any reliable accuracy. The reality is that most people have short memories and don’t even remember what they had for lunch yesterday.
What most investors don’t realize is that this year has actually been a pretty crummy year (if you have an intelligently designed portfolio). A boilerplate portfolio that is tech laden or primarily weighted in domestic stocks is going to outperform whereas anyone that has a proper and healthy dose of other assets classes (like International exposure) is going to be down. The all world global market is actually down almost -10% from peak levels in January. This environment reminds us very much of 2015 when the S&P 500 barely eked out a positive return just over 1% (mainly from dividends) but international stocks got pummeled. This frustrated most novice investors to either complain to their advisor or worse yet sell international and emerging market investments (which subsequently rallied hard).
The four most famous and perhaps dangerous words in all of investing are “this time it’s different”. Indeed…the way this bull market eventually comes to a halt will be different but several things will be the same. (1) People will panic (2) “Experts” will tell you I told you so, and (3) someone will eventually come out and explain they have been in cash since the peak.
Bull markets don’t always die due to a sudden or singular event. What’s more common is that they come to a grinding and treacherous phase when the economy begins to slow down. Right now is the time to revisit your allocation and ask yourself if you have enough dry powder available in six months. Our advice is to make that happen because you will have a major opportunity to outperform traditional boilerplate portfolios that will be forced to “ride it out” when ‘you know what’ hits the fan…
We’ll leave you with this relevant quote:
“Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” -Sir John Templeton