Volume 86 No. 9 - September 2015
Lately, most of the financial media’s attention has been on the market’s dramatic swings. Suddenly, terms like panic, recession, correction and sell-of have become commonplace language again. For some this invokes images of 2008 as the housing bubble collapsed and took with it both stock and bond markets.
To be clear, we are not in 2008 any longer, nor are the economic conditions anything like they were then. Where we are now is significantly recovered from the market lows of the great recession with ever improving economic indicators and until a few months ago, new all-time highs in most stock market indexes.
For the last few years, particularly since the recovery firmly took hold, the markets have been fairly predictable. During that time US stocks have been generally modest in their daily gains and losses. Up days outnumbered down days and as new highs were achieved time and again, investor’s feelings of satisfaction continued to grow.
Suddenly, wild swings in the stock market caused large single day losses, sometimes to be recovered the following trading day, sometimes to experience further decline. Intraday markets were even more striking in the speed and magnitude of shifts between rising and falling. The financial media immediately proclaimed Armageddon and watched as their ratings rose with every corresponding market decline.
If we push past the fear, hysteria and outright nonsense gripping cable business news we find that while things are complicated, and certainly more volatile than we’ve become accustomed to, they are also generally positive and what we’re experiencing isn’t out of the norm.
Outlook for Stocks
If you were watching the markets during the second half of August you would have been forgiven if you thought you were back in 2008 with all the wild ups and downs we witnessed. However, things are very different now than they were then.
While factors such as interest rates, China, Greece and the European Union, the upcoming presidential election, stock valuations and numerous other factors continue to weigh on investor’s minds, the fact of the matter is economic indicators, particularly in the US are largely positive and seem to be continuing in that direction.
Sometimes markets just adjust rapidly – and not always for a good reason or any reason for that matter.
Globally, the world economy does not look like it’s on the verge of recession. The US economy looks even better in comparison.
Even though the market may have, at least temporarily, hit official correction territory, defined as a drop from the peak of at least 10%, most fundamental drivers like corporate earnings are still robust.
In our view, nothing we’ve seen indicates that we are in, or heading for, a recession, whether domestically or globally. Furthermore, stock market corrections are normal. They happen fairly regularly. Frankly, the abnormality here is how long we’ve gone without one recently. Tis may not be the end of large up and down movements as we seek to re-establish normal trading over the coming weeks and months.
In the immediate future many market watchers will focus in vain on every indicator, both positive and negative as a sign of things to come. While we also prefer less volatile markets ourselves, we may use this as an opportunity to purchase high-quality names at attractive prices where appropriate.
Outlook for Bonds
The one thing, more than any other, that is weighing on both stocks and bonds right now is interest rates. As rates rise, bond prices fall. The opposite is also true. The worst thing for markets though is the unknown: will rates rise or will they stay the same?
Given the recent jumpiness in the market, the Federal Reserve is now slightly more likely to hold of on raising rates at their September meeting, as is widely expected - particularly if market jitters continue through to the meeting on the 16th. Although, consider that even before the market had its correction a rate hike was far from a certainty even though it was widely expected.
Should the Federal Reserve raise rates at the September meeting, bond investors may rejoice as yields will finally start to resemble something more in line with historic norms and bonds will become more attractive alternatives relative to income generating stocks.
In the event the Fed does not raise rates at the September meeting they become even more likely to do that at the following meeting at the end of October. Most Fed watchers and economists agree that a rate hike is a near certainty before year-end.
When markets experience a sudden increase in up and down movements, or volatility, such as what we’ve seen the past few weeks, there is a tendency to want to do something. This is almost always driven by panic and fear, not rational thought. Ultimately it rarely works out for the better and does nothing other than to maybe curb fear somewhat. The expression that comes to mind is: “Don’t just stand there, do something!”
If we can stand back far enough to approach this rationally we realize that the correct course of action is really: “Don’t just do something, stand there!” Markets rise, markets fall, and timing them is impossible. If you’re in the market you’ve already experienced losses on paper. Selling stocks now makes those losses real. Does that seem like a sound strategy?
Investment Counsel’s approach to selecting securities and building portfolios has always focused on managing volatility through proper diversification and owning the best securities available. This is why the stocks we buy for our clients are typically market leaders with global businesses. These firms usually pay dividends and are larger-than-average and well established, which helps soften the ups and downs when markets re-adjust.
Remember that the key to making money is to buy low and sell high, not the other way around. Stick to your plan, focus on the long-term and don’t let market noise throw you off track. Also realize that what the financial media may try to spin as a panic is merely the market behaving as it always has – somewhat unpredictably and sometimes violently in response to myriad of news, emotions and unknown factors.
Lastly, until there is greater clarity on interest rates and maybe some consensus direction on corporate earnings is established, this increased level of market volatility may be here to stay for a while.
Investment Counsel Inc. is a registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.