Chances are, these days you’re sneaking a peak at the investment markets, probably more than once a day. They’ve certainly been providing their share of excitement: down 4% one day, up more than 2% the next day or two, and who knows what’s causing the turmoil? Last week, the S&P 500 index and Dow Jones Industrial Averages (DJIA) were both down about 3%.
In August, the direction was mostly down, turning what had been tentative gains for the year into (as yet) relatively modest losses. And there wasn’t a lot of value in diversification. Large cap, midcap and small cap U.S. stock indices all dropped between 5.5% and 6%, real estate fell about the same and foreign stocks dropped roughly 7% over the same time period. Commodities did worse.
Analysts are scrambling to tell us why, one day, the markets are down sharply, and then come up with a reason why, the next day, they’re back up again. One long-term trader remarked, watching these swings, that the fact that the Dow can fall 1,000 points and then recover 700 in the space of four hours is prima facie evidence that there is no rational explanation for what’s going on. We hear that the weakness in the Chinese economy, or its stock market, are causing U.S. stocks to somehow be less valuable, but does anybody really believe that?
Meanwhile, the doomsayers are predicting catastrophe—which is not well-defined, but seems to mean that U.S. companies will be 30% to 50% less valuable in a few weeks than they are today. Their solution? Buy gold! It’s helpful to remember that $10 invested in gold in 1926 would be worth $615 today. Ten dollars invested in the stock market would be worth $55,000.
Perhaps the most interesting analysis came from Jason Zweig, who writes an investment column for the Wall Street Journal. He said that this would never happen, but what if there were a Ben Graham TV channel, which provided market commentary based on the teachings of the father of value investing? You’d have the host coming on to announce some great news: stocks today are unexpectedly on sale, selling, on average, 4% cheaper than they did yesterday. Will this great news continue, or should we take advantage of the buying opportunity while it lasts?
The guest that day offers his hope that the markets will continue their downward rally, making stocks even cheaper to buy. But he’s not optimistic, given the fact that stocks seem to get relentlessly more expensive over time, and have been doing this, with some regularity, since the early 1800s. Still, one can hope for a sustained downturn that would provide a chance to buy at prices even lower than they are today.
The host and guest console themselves with the thought that finally, for the first time in seven years, we may finish out the year with an opportunity to buy stocks for less than they cost on January 1.
We may not get that lucky, and the markets may continue their bull run. Nobody knows what you’re going to see the next time you check the investment tables, or what will happen between now and the end of the year—except this: the actual value of American and global companies won’t be affected by the mood swings of investors who lurch between an inclination to buy and an inclination to sell. Whatever those underlying values are, the markets will eventually return to them, however much of a bargain the market decides to offer us between now and then.
From an economic standpoint, the data still supports further growth in the U.S. economy. Even though both the Institute for Supply Management surveys for manufacturing and services ticked down slightly in August, they remain in expansion territory. August’s employment report released last Friday, showed that the unemployment rate moved down to 5.1%. Job creation was less than economists had expected; however, figures for June and July were revised upward, and it’s possible that the August (estimate) could also be adjusted higher, once the start of the school year is taken into account.
There has been little change in the technical picture of the markets. The Advance-Decline Line (number of stocks going up versus going down) is still weak. However, downside leadership eased somewhat during the week, and selling pressure hit an extreme last Tuesday, which was followed by a triple-digit rebound in the DJIA on Wednesday. Extreme oversold readings, which often occur at the end of a downward move, can indicate that the bottom of a correction is imminent. However, a failure of the market to bounce in view of extreme oversold readings, can be a bear market warning sign. We’re watching this closely.
In view of the volatility still present in equity markets, it’s important to stay objective. The economic data is solid; yet we are concerned with the technical market picture and the Federal Reserve policy announcement on September 17. Currently, our client portfolios are defensively positioned, and further defensive adjustments will depend on how the evidence emerges in coming weeks. Once again, if you find yourself uncomfortable with the market gyrations, or you’re losing sleep, then perhaps you should take advantage of the rallies in the markets to lighten up on some of your positions (this is not to be construed as investment advice; please consult with your financial adviser, or better yet, call us!).
If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.
Sources:
Wilshire index data: http://www.wilshire.com/Indexes/calculator/
Russell index data: http://www.russell.com/indexes/data/daily_total_returns_us.asp
S&P index data: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf–p-us-l–
http://www.tradingeconomics.com/united-states/unemployment-rate
Nasdaq index data: http://quicktake.morningstar.com/Index/IndexCharts.aspx?Symbol=COMP
International indices: http://www.mscibarra.com/products/indices/international_equity_indices/performance.html
http://finance.yahoo.com/news/dow-briefly-drops-150-points-135905615.html
Investech Research
The MoneyGeek thanks guest writer Bob Veres for his contribution to this post
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