As those of you who are “long-time” friends and clients know, I began writing “Riding the Rockies” in 2009, at the height of the Great Recession. The title comes from my love of road cycling above 10,000 feet in the Rocky Mountains and the analogy to the ups and downs of the stock and bond markets.
Over the past 12 months, with our transition off the platform of our old provider and with the steep learning curve associated with the several new technological tools we are using to provide better client service, I got away from writing this blog. I was also informed by some whiz-bang “marketing guru” that my audience wouldn’t understand the symbolism. I think he’s wrong and my belief is that my friends and clients “get it!”
The irony is that this year’s Denver Post Foundation’s “Ride the Rockies” route is being announced tomorrow and shortly thereafter, I am registering for this year’s ride which I skipped this past year, due to our business transition to independence.
Before I comment on today’s market action, let me just update you on the state of Alpha Beta Gamma Wealth Management and Alpha Beta Gamma Risk Management. We have added a new associate in the form of Mrs. Raquel Bencosme. We opened a Chicago branch office in November of 2017 which is manned by Reg Robinson who is doing a terrific job for us despite brutal cold, wind, and snow. We have contracted with some of the best macro research providers in the industry (Strategas) and we augment their research with Bespoke and Standard and Poor’s. As you know, we have access to a plethora of “sell-side” research including access to Goldman Sachs, Merrill Lynch, and others. The buildout of our research platform has proven to be invaluable to making superior “investment calls” over the past several weeks. Finally, we are utilizing a risk/reward technology called “Riskalyze” which allows us to custom-tailor our portfolios to your specific risk/reward desires. This week has proven this to be very effective.
Let’s get to today’s market sell-off:
If you only recently started investing, or if you have a short memory span, the last week of trading in the financial markets feels like a heck of a lot more than a flesh wound. From the 20,000-foot view of things, though, it’s all part of the regular ebb and flow. Yes, this week’s pullback was the first 3% decline from a closing high for the S&P 500 since before President Trump was elected, but going back to the late 1920s when the S&P 500 began, how many 3% pullbacks do you think there have been? 100? 200? 300? 400? 500? 600? The actual answer is 628. That works out to about seven per year.
What this week’s sell-off was enough for was to finally end what was the S&P 500’s longest ever streak
without a 3% decline from a closing high.
- The current streak of 448 calendar days which ended on 1/26 and was confirmed with Friday’s decline easily surpassed the prior record of 370 days that ended on 12/13/1995.
- In the entire history of the S&P 500, the most recent streak was only the 8th time the index ever went 200 days without experiencing a 3% pullback.
- We hope you enjoyed it, because the period from when Trump was elected through last Friday is one that any investor alive today is unlikely to experience again in their lifetimes.
So, what can we expect from equities now that the streak is over? Below we summarize the S&P 500’s
historical returns following the date when each of the prior seven prior streaks of 200 or more days
without a 3% pullback was confirmed (column three in table).
- One week later, the S&P 500 saw mixed returns with gains less than half of the time.
- Once the dust settled, though, it looks as though investors usually stepped back in with gains over the following one, three, six, and twelve months at least 70% of the time.
What has caused the volatility that we witnessed this week? In our view, four primary factors:
- A reversion to the mean. Markets were overheated, and they simply sold off, reverting to the mean averages. (We remain above those averages so further retracement is possible.)
- Foreign exchange which, for international investors, as made U.S. based total returns far less attractive than investing in their own countries without currency exchange risks. Much of the past 13 months of gain has been fueled by foreign investment in U.S. markets.
- High commodity prices and wage rates which have spawned fear that the Federal Reserve will increase short term lending rates to combat rising inflation, causing a sharp selloff in bonds, today with an accompanying selloff in stocks. This is a break with a significant trend of the past 30 years and is not something most investors, other than we “old dogs” have experienced before. New trends produce high anxiety in the Wall St. canyons.
- Significant concentrations in high stock values amongst the “darlings” of the indexes including the FAANGS, Boeing, and a few select other companies, who’s market index weightings and price movements drove market indexes to a string of 86 new highs in 2017.
So “Is all lost?” Our succinct answer to the question is “No.” While we had the post-election “Trump Bump” and then the anticipation of significant tax cuts into the end of the year, we believe that stock valuations are now dependent upon corporate fundamentals. The earnings reports for the fourth quarter continue to come in at levels above analysts’ estimates. Tax reforms should begin to kick into earnings in the second and third quarters and we don’t see any slowing in the economy.
Corrections create opportunity. They’re like an evening rain following a “muggy” day. There is the ferocity of the storm followed by the flushing out of high humidity, heat, and the accumulated closeness of the atmosphere. What replaces that environment is calmer weather, cooler temperatures, and a freshness that didn’t exist the day before.
Those of you who have been clients of mine for many years know that I view these events as heralding opportunity. While many panic, we step back, assess the environment and our positions, and look to where we can improve overall returns by taking advantage of market dislocations.
We think that there may be more reversion of the mean to come in the next few weeks, but we believe that global reflation is presenting opportunity both domestically and abroad. These kinds of moves do not occur without some volatility, but, we believe that the trend continues to the upside. Over the next 36 to 60 months, this past week’s market action will be merely a blip on a long term chart.
We are looking for sectors with lower volatility and good underlying fundamentals. We believe that there are some opportunities in the emerging markets where population growth is driving GDP rates that are higher than those, here in the U.S.
If this volatility, however, is concerning to you, let’s talk about ways to add Gamma to your portfolio through principal protected investments that still capture some of the market upside.
For more information as to what we like and are looking at, please feel free to email or call me at [email protected] or 561-207-6399.