Written by Nathan White, CFA
There are certain events that happen in your lifetime that you always remember, such as getting married, the birth of a child, etc. Experiencing the worst market decline ever is probably not an event you want to have on your list.
These are definitely historic times.
I thought it would be interesting to post this chart to illustrate the current circumstances in the stock market.
This chart shows how the current market volatility compares with other tumultuous times going back to 1957. You can see that volatility spikes above 2.5 coincide with major market sell-offs and bottoms. In hindsight, these were great buying opportunities as evidenced by the significant rallies that occurred after each spike.
That brings us to the current situation which as you can see is literally off the charts!
Theoretically, a 6 percent standard deviation event is expected to have a 0.0000001973% chance of occurring! Of course that is based upon the theory that markets follow a normal distribution or in my words in a “normal world.”
The problem is that real life is often anything but normal. So now we find ourselves in the present “historic” situation where the market decides to destroy all investments and all of the accompanying strategies and models no matter how successful they have been.
I’m a big believer that history repeats itself, but never in quite the same form.
If you are looking for a silver lining to all of this craziness just look at what happens after the volatility spikes and remember that during the spikes people become convinced that the bad times will never end and bad news permeates everything.
Written by Nathan White, CFA
photo by erik ERXON
How long will the current historic levels of volatility remain?
Investors everywhere seem to be throwing in the towel, and the selling never seems to end. The negative sentiment feeds on itself as selling begets selling.
Opportunities abound, but mean little when everyone wants out. There was an article in The Wall Street Journal last Friday, Nov. 7 about the forced selling at mutual and hedge funds because of redemption request. Even the few hedge funds that are up on the year are receiving redemption requests of a quarter to a third of assets! How’s that for gratitude!
I definitely believe it is a good time to buy when people are being forced to sell.
The problem is there is no way to know when it has ended until after the fact. Now is not the time to change your entire portfolio allocation to cash if you need returns better than cash for the long-term.
During extreme periods of volatility such as the current environment, it is very difficult to think long-term. The crowd will extrapolate what is happening in the short-term into the long-term and over do it.
You see that happen on the upside and the downside. Your financial decisions should be based on a long-term view so that when these types of circumstances occur you are not forced into a rash emotionally charged decision.
Written by Dave Young, president
photo by mikebaird
The stock market just endured the worst October since the crash of 1987.
It was slammed by what Alan Greenspan called a “once in a century credit tsunami.” He said it shattered some of the models he has relied on over the past 40 years.
Volatility hit levels I’ve never seen in my 25 years of investing. The selling was massive, and it affected every asset class. Whether you invested conservatively or aggressively, everyone felt the pain. In previous declines, about 30 percent of stocks move up while the majority moves down. This time, there was nowhere to hide with 98 percent of stocks moving down. Since last October, the S&P 500 has lost about 45 percent of its value.
What do we do next?
In previous panics, it has been a mistake to follow emotions and sell after a crash. It’s better to take a deep breath and assess how much downside risk there is versus upside potential.
This is the 34th bear market since 1900. During that period, it is the 5th worst decline in the U.S. market history. Stock prices are down to the levels they were 11 years ago. That means stock prices don’t currently account for growth in population, advances in technology and gains in productivity of the past 11 years. Every statistical measure we use to value stock indicates they are screaming bargains.
In the previous bear markets, after hitting bottom and turning positive, the market’s average return has been 296 percent over the course of the subsequent bull market.
As the market recovers, these returns usually come in bursts, which is why it is usually a mistake to sell out in the depth of a bear market.
Reasons to be Hopeful
The market hit extreme lows on Oct. 10. Since that time it’s moved violently up and down, but has stayed above the Oct. 10 lows. Each time the market has sold off since then it has been on low volume, which is a good sign. Also, 11 of our 12 bottom-watch signals signify we’re close to the bottom.
This sell off started as energy prices moved higher. Every time oil prices went up the stock market went down. Higher gas prices gave consumers less to spend, which was negative for the economy. The price of oil has since quietly dropped from $147 to $60. Hundreds of billions of dollars sent overseas for oil are now staying here. This savings should act as a stimulus and be positive for our economy.
The sub-prime lending mess also contributed to the market meltdown.
It evolved into a credit crisis, which almost brought our economy to a halt. Our government throwing $700 billion worth of stimulus into the banking system will likely repair the credit mess. It will take time, but it should fix another problem that brought the market down.
The Longest Presidential Election Ever
We just endured the longest election of all time. Twenty months ago, Barack Obama began telling us how terrible things were and how important it was that we elect him to change them. When he started his campaign, things were actually good and we were in the late stages of a five-year economic expansion. Even though our economy was hitting on all cylinders, he did his best to convince us otherwise. His negative spin negatively affected consumer and business confidence.
Our economy is based on confidence.
If you kill that confidence, you kill the economy. Consumer confidence levels are now at an all-time low. Obama proved if you say something long enough, people will start to believe it. The good news is the election is over and his drumbeat of doom should now turn positive.
I can’t see into the future, but based on history, it appears we ar bumping along a market bottom. My general recommendation is to stay invested and move your portfolio into areas of the market that historically come back the fastest when recovery begins. We are currently doing this for our clients. Keeping a long-term focus has always rewarded investors in the past.
Contact us if you have questions or need advice 801-375-2500.
Written by Nathan White, CFA
photo by Anzman
I’ve never been so glad to have an election over.
The constant political bombardment seems to leave me shellshocked. My view on politics is dour.
I just plead with whoever is in power not to screw things up too much. Is that really too much to ask?
I want politicians to get out of the way, but since that will never happen the best I can hope for is minimum damage.
Overall, I consider myself a “cynical optimist” with the view that hard work and a good attitude along with a realistic view of things can get us through anything in life. However, when it comes to politics I find myself becoming ever more pessimistic (I guess that is the cynical side of me winning outright). I try to be optimistic, but it is becoming increasingly difficult as I get older.
Pleas for President-elect Obama: the damage to the markets has been done. Please don’t make it worse.
We don’t need a movie entitled “Hoover/FDR II- the sequel.” Just get out of the way!