Category Archives: Bonds

Mid-Year Review And Outlook

Posted July 12, 2017 by paragon. tags:Tags: , , , ,
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Written by Nathan White, Chief Investment Officer

Volatility in the equity and bond markets has been at historic lows. The economy has been strong enough to support stocks, but not too strong to disturb bonds. While still on the expensive side, equity markets are being sustained by growing earnings. They are also still anticipating an increase in economic growth based on upcoming fiscal and policy measures. If the intended reforms keep getting delayed, it could result in a return of volatility in the second half of the year.

Global growth has been improving, and so far looks to be around 3.4% for the year compared with 2.3% for the U.S. As growth in places like Europe has improved, the ECB is setting up to follow the Fed’s footsteps in tapering its extremely accommodative monetary stance. Central banks are becoming more hawkish and could be worried about financial stability. That means they need to keep/start tightening to stay ahead of any issues and build up their ammunition. But for now, asset prices keep improving in this low inflation environment.

Recently there have been indications that the leaders of the first half of the year seem to be overdone. Whether it is simply profit taking or an outright rotation remains to be seen. We could see a churning process throughout the summer as the market tries to digest the first half gains and anticipate the environment and factors that will affect the second half of the year. For now, 75% of industries are still in uptrends. The majority of our models are bullish, but we have seen deterioration in some areas. We would like to see a broader advance across all segments rather than just the narrow leadership that has occurred. Our sentiment models are flashing caution, as they are in the overly optimistic zone. Earnings growth must continue in order to support current high valuations in the face of rising bonds yields.

Growth names doing well in a low economic growth enviroment? 

On the face of it, you would think growth stocks would do better in a high-growth environment, as opposed to the current moderate economic growth conditions. Well, markets aren’t always logical. As the stocks that benefitted from the Trump rally stalled along with his reform agenda, growth stocks took over and became first half leaders. Sectors such as Technology and Healthcare have been the best performers. In an environment of moderate growth, investors placed a premium on names that are currently growing. Much of the focus was concentrated in large mega-cap names such as Facebook, Apple, Amazon, Microsoft, and Google. These five names accounted for about one third of the S&P 500’s year-to-date gain. They are basically defensive names in a low-growth environment. Our exposure to these names has accounted for most of TopFlight’s gains as well.

Our seasonality model, which has performed well the last few years, was a laggard in the first half of the year. The energy sector tends to dominate this model in the first half of a year, but energy stocks have been poor performers due to the drop in oil prices. Seasonality signals are not high conviction through summer months. Small-cap stocks have also been trailing large-cap stocks, as they are more economically sensitive. We have observed this in our small cap momentum stocks as well.

Outlook for the second half of the year 

If a rotation out of the first half leaders develops, we could see a move from growth into value. This would better benefit the energy and financials relative to the technology and large cap growth names. We have had a slant toward value and small-cap in the first half of the year. These stocks will potentially benefit from a shift of growth to value in the second half of the year. We will keep exposure to the high-flying names for now, but want to keep exposure to the value names that have lagged, as they could benefit from a rotation in the second half of the year. If the Trump agenda gets close to becoming reality again, then our small-cap and value exposure could take off.

With oil breaking down, it creates an opportunity in the energy names. Sentiment on the sector is extremely low, and large financial traders drive oil prices in the short run. In the end, low prices are the cure for low prices in commodities. We don’t know where the bottom will be, but are watching this sector for potential plays in the stronger names.

Managed Income 

Interest rates are slowly heading higher. The Fed has raised rates twice this year and is indicating one more increase later in the year and additional ones next year. The Fed also announced it will start to reduce its massive holdings later this year. This will put pressure on bond prices — warranting caution with one’s bond exposure. We still do not recommend buying long maturity bonds, especially as yields have fallen. The extremely low yields are still not worth the risk of owning at these elevated prices. However, we are still in a waiting game until we can lock in higher yields. We have a significant amount of capital to deploy, and we want to wait for a more favorable environment. As yields have come down on longer maturity bonds, they have moved higher for short-term bonds due to the Fed raising rates. A flatter yield curve calls for shifting into cash rather than bonds. We favor short-term corporate bonds where the yields have moved up but the prices have not. We only want to use Treasury bonds as protection as opposed to an outright investment.

We are watching some oversold names in the REIT and telecom space. For example, in the heavily damaged retail space, Tanger Factory Outlet Center (SKT) is looking attractive. With its modern stores and attractive locations, it has been drawing customers away from traditional malls. Its retail tenants comprise unique desired brands along with a discount aspect enabling Tanger to boast a 95% occupancy level. The stock also has a 5.2% yield.

Disclaimer: 1. Investment performance reflects time-weighted, size-weighted geometric composite returns of actual client accounts. 2. Investment returns are net of all management fees and transaction costs, and reflect the reinvestment of all dividends and distributions.  3. The S&P Index is a market-value weighted index comprised of 500 stocks selected for market size, liquidity, and industry group representation The Barclays Aggregate Bond Index is a benchmark index made up of the Barclays Government/Corporate Bond Index.  4. Benchmarks are used for comparative purposes only. The Paragon Top Flight Portfolio is not designed to track the S&P Index and will have results different from the benchmark. The Paragon Managed Income Portfolio is not designed to track the Barclays Bond Aggregate Index. 5. Past performance is no guarantee of future results. Investments in securities involve the risk of loss. Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

Investment Choices in a Low Rate World

Posted April 29, 2016 by paragon. tags:Tags: , , ,
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On March 29, Fed Chair Janet Yellen gave a speech to the Economic Club of New York. Before you fall asleep, as is usually justified when it comes to mind-numbingly boring economic talk, let’s discuss how her comments will directly affect your investments. Yellen advocated for letting the economy run hot before continuing to raise interest rates. She basically admitted that the small increase administered by the Fed in December was a mistake, and that global and market events have significant influence on policy. (You don’t say …)

So now that the expectation of “lower for longer” interest rates is all but set in stone, how will this affect your investments?

First and foremost, the yields offered on savings and money market-type accounts will remain paltry. It will be hard to find and earn a safe return. Simply put: If you want a return, you’re going to have to take on more risk. Taking on more risk exposes one to a higher degree of losses and volatility. (Ironically, this is exactly what investors looking for a “safe” return want to avoid.) The search for anything with yield has caused the prices of bonds and other income-yielding assets to rise dramatically in price.

Many investors seeking yield have turned to alternative assets such as junk bonds, MLPs, utility, telecom and other dividend stocks. Whereas these can be valid long-term investments, many are treating these assets as “bond proxies” while ignoring their stock-like risks. These alternatives do have better yields than many safe assets, but they are exposed to the gyrations of the stock market. It doesn’t take much of a drop in the equity market to wipe out the small yields these alternatives offer. Plus, they’re expensive, and these assets are sensitive to changes in rates. At today’s low rates, this risk has become even greater.

Because bond yields move inversely to bond prices, it is getting harder to squeeze price returns out of bonds as interest rates get lower. The closer rates get to zero, the more sensitive bond prices become to changes in rates. As bonds increase in price, their future returns are lowered. This is true even if rates go sideways from current levels.

To understand the current situation for a conservative asset and what it implies about future returns, refer to the displayed chart. This chart presents the historical interest rate (black line) and the total return (red line) for the 10-year U.S. Treasury bond since 1928. Interests rates peaked in 1981 as the Fed finally hiked rates dramatically to kill inflation that had hobbled the economy for an extended period. Notice the sharp increase in the total return line that corresponds with the long drop in interest rates since the peak in 1981. During this period, shaded in blue, bonds performed very well. Now review the area shaded in green, which displays a period of rising interest rates. The red total return line barely rises during this period, illustrating the poor performance of bonds during this 41-year period. The point of the chart is to compare where interest rates are now and what happened to future returns the last time they were at this level. At a current yield of around 1.75% for 10-year Treasury bonds, the future return of bonds does not look good.

The Fed and other central banks are putting on a full court press to get higher inflation. But what happens if they actually get what they want? Inflation is the No. 1 enemy of bonds because it erodes the future value of bonds’ interest payments and return of principal. Central banks must raise interest rates to offset the negative effect of inflation. As interest rates rise, the prices of bonds go down. The lower rates go, the less cushion (in the form of interest earned) there is to offset decline in bond prices that come with increases in interest rates. Not predicting rampant inflation, but even a return to “normal” inflation can significantly affect bonds at their current prices. That is at the heart of what makes the current environment so risky.

So, in this low-return environment, how will we generate returns in Managed Income? Fierce flexibility and continued commitment. We look at the risk first, and then compare it to the potential return. We are more opportunistic. We expertly use a combination of strategies to offset risks — and work endlessly for your best interests. One thing is certain: Our flexible strategy will be the best approach to this uncertain future.  Here are some current investment choices that we feel offer better return for the risk versus the average alternatives that many investors chasing high yield are opting for:

High Yield/Higher Risk

  • Long Maturity Bonds
  • High Yield (Junk) Bonds
  • High Dividend Stocks

 

Better Option

  • Short to Intermediate Corporate Bonds
  • Preferred Stocks
  • Some REITs and Closed-End Funds
  • Dividend Growth Stocks

 

Disclaimer Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

Backed against the wall….

Posted September 26, 2014 by admin. tags:Tags: , , ,
The chains

Hands chained up

We, along with many others, have been cautious about the bond market for some time.  As the sun sets on QE the angst over when the Fed will start to raise rates and by how much is rising.  Markets always like to price things in ahead of time and right now it seems the equity market’s recent nervousness could be due in some part to this interest rate uncertainty.   The bond market however has not moved much yet.  Many, including us, thought that the bonds would have a difficult year as they start to price in the rate increases.  Instead, bonds have (so far) have had a good year surprising many.  Alas, the inevitable is coming though and the window for bond gains is closing as we creep toward June of next year which is the most accepted time that the rate increases will begin.  Any equity market weakness will give bonds more time to put off the reckoning.

Any rally in bonds should be sold as their time is getting short.  I think you’re seeing the cracks appear in the high yield market right now.  Historically, high yield is more correlated with the equity market and not that sensitive to interest rate risk but at these low rates it now contains interest rate risk as well.  With yields still below six percent the reward is just not worth the risk for holding junk bonds.

Although we don’t find bonds attractive it doesn’t mean that a bloodbath is coming.  It will probably be more like death by a thousand cuts.  The Fed will be very slow and steady in raising rates as to minimize market disruption.  After all, they do hold about $4.5 trillion of bonds!  The first one to two percent moves from the bottom will be the most painful but in a gradual manner as mentioned.  A year from now interest rate could be a half to one percent higher.  Take a look at the duration of your bond holdings and compare it to your yield – you’ll be hard pressed to find anything that would come out positive…

Written by Nathan White, Chief Investment Officer of Paragon Wealth Management

 

Disclaimer Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

More Money….But We Are Going To Pay For It

Posted September 18, 2013 by admin. tags:
Pile of American Money


Written by Nathan White, Chief Investment Officer of Paragon Wealth Management

The Fed surprised markets today by not beginning to taper
the massive QE program.  Markets were generally expecting a $10-15 billion
reduction and jumped sharply higher on the news.  The supposedly more
transparent Fed was anything but with this announcement.  This could cause
more volatility going forward as it introduces more uncertainty as to what the
Fed will do.  One thing for certain is that the taper will not begin under
Bernanke’s watch.  He is getting out before the hard part comes and
currently his most probable successor, Janet Yellen, is the most dovish policy
member.  That means it will be awhile before QE is ended and even longer
for an interest rate increase.

Personally, I think the Fed dropped the ball.  Better
to start to rein in QE now when things are not bad and let interest rates get
back to normal.  The important price signal that interest rates provide to
the economy has been muted for too long and is now hindering economic growth.
The longer the Fed continues QE the longer we will have subpar growth.
The longer they wait the harder it will be to do it down the road.
As I have often stated, if the economy does improve the Fed will be forced to
tighten which has a dampening effect on the economy bringing us right back down
to subpar growth.  If they don’t tighten when economic growth increases
then the inflation monster will rear its ugly head.

We will have to see how this plays out in the markets over
the next while, but this might provide an opportunity for bond investors to sell
into strength if rates on the 10 Yr head back down towards 2.5% or lower.

Disclaimer
Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

Backing Into A Dead End

Posted July 27, 2012 by admin. tags:Tags: , , ,
Dead End

photo by bennylin0724

Written by Nathan White, Chief Investment Officer, Paragon Wealth Management

Backing into a dead end is the way I feel about much of the bond market right now.  It might keep you off the risky streets, so to speak, but eventually gets you nowhere.  Just when you think rates couldn’t go any lower bond yields continue to hit record lows.  The 30-year Treasury hit a record low of 2.47% and the 10-year is around 1.42%.  Yields are getting compressed across the board.  Simply amazing to put it plainly.

Prudence would dictate to take profits on bonds but where would you put the money if you’re a conservative investor?  In order to get a real yield on any bond investment it must either be in the high yield (junk) space or you must go to the long end of the curve.  That means you’re taking on significant risk.   The alternative is to put your money in cash and get nothing and hope that inflation stays low so your purchasing power doesn’t erode.

Bonds seem to be entering what could be their final blow-off phase.  There is so much money that continues to flood into bonds due to many factors but there is not much road left at this point.  We are starting to hedge our bond exposure (almost all corporate) from this point on as the reward is just not worth the risk.  For example, as of 7/25 the iShares Barclays 7-10 year Treasury Bond ETF (IEF) has an average yield to maturity of 1.15% with an effective duration of 7.51.  What this basically means is that the price appreciation potential from this point is barely over 7.5% and the 10-year would have to drop to zero for that to occur.  Just a year ago the 10-year Treasury was in the high 2% range which was still amazingly low.  If the yield returned to that level the holder of IEF would lose 7.5% and it would take 6 – 7 years with its measly interest rate to get back to even.  That’s not the kind of trade-off I like but one that large numbers of investors are currently taking.

Disclaimer
Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

How Can Conservative Investors Survive in this Low Interest Environment?

Posted March 29, 2012 by admin. tags:Tags: , ,
Piggy Bank

Paragon Wealth Management advised conservative investors to think twice when investing in CDs or money market funds.

“Investors who save money in CDs and money market funds don’t have a lot of options right now,” said Dave Young, president and founder of Paragon Wealth Management. “With inflation rates at 3 to 4 percent and interest rates between 0.5 and 1.9 percent, savers are actually losing money in their “conservative” accounts.”

Ben Bernanke, chairman of the Federal Reserve, said they’ll keep interest rates this low until sometime in 2014.

“Savers can either stay ultra conservative, and watch their savings go down each year or take a little more risk in order to get higher returns,” said Young. “On a one to ten risk scale, with ten being the most risky, I believe that many investors would benefit by slightly moving up the risk scale.  If they move from a level of one to a three or a level of three to five they could potentially, significantly increase their earnings.

Young said, “On the other hand, investors shouldn’t jump from very low to very high risk.  That is usually when you see problems. Sometimes investors get tired of earning one percent, so they quit and move over into something extremely aggressive that promises a 20 percent return. He cautioned investors not to get extremely aggressive and invest in things they don’t understand, because that is often when they lose everything.”

“It is important for investors to determine their asset allocation based on their individual risk tolerance,” said Young. “This will help them stay invested over the long-term and optimize their investment choices.”

Making sure your portfolio is structured properly is more important than ever with interest  rates this low.

_____________________________________________________________________________

Watch this video to learn more about how to invest when interest rates are low.

Disclaimer
Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

The First Break?

Posted March 15, 2012 by admin. tags:Tags: , ,
Chess Game

Written by Nathan White, Chief Investment Officer, Paragon Wealth Management

Is this the first move in the long awaited end to the bond bull market or just a short-term blip? Treasury yields shot up yesterday after comments by the Federal Reserve seemed to indicate that since the economy is picking up there would not be a need for another round of bond purchases.  Interest rates have been pushed to historic lows due to slow economic growth, central bank purchases, flight to safety moves (i.e., European credit fears), and general investor aversion to equities. Due to these factors the U.S. government has had an easy time financing its large budget deficits which has pushed debt levels up drastically. Eventually these government actions could lead to significant inflation and/or a fiscal crises such as Europe is experiencing which would be significant negatives for bonds.

Massive amounts of investor money has been flowing into bonds and they posted stellar performance last year. Many (including us) have been calling for the end of the 30 year bull market in bonds because with rates at near zero they simply can’t get any lower. The difficult part is trying to call when rates will start moving back up. Over the past 3 years many have placed unprofitable trades trying to time the end of the bond bull market.  The idea is right but the timing (as always) is difficult to pull-off.  Just because rates are low doesn’t mean that they will jump back up drastically.  Many factors (i.e., baby boomers retiring, continued central bank action, credible deficit reduction actions, etc.) could keep a lid on rates for a while to come.  Perhaps it will just be a slow inexorable climb. So has the tide started to shift?….stay tuned.

Disclaimer
Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results. 

 

Paragon’s Advice on Bonds

Posted October 27, 2011 by admin. tags:Tags: , , , ,

Luke Tait and Dave Young from Paragon Wealth Management discussed bonds in this short video. Watch the video to listen to their advice and learn what you should do as an investor. 

Disclaimer
Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

Downgraded…

Posted August 8, 2011 by admin. tags:Tags: , , , , ,
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Written by Dave Young, President of Paragon Wealth Management

Over the past couple of weeks we’ve seen extreme volatility in the financial markets.

The volatility started with political drama over the debt ceiling, which initially created uncertainty for investors. After a high drama last minute agreement, which apparently didn’t solve anything, the markets sold off hard. Uncertainty in Europe exacerbated the situation.

It looked like we might have put in a market bottom last Friday with the selling reversing midday. Then, Friday evening we found out that the S&P Bond Rating Agency had lowered their rating on U.S. Treasury Bonds to AA+ from AAA.

Their timing couldn’t have been worse. 

I knew we were in for a ride, but wasn’t sure how much of one. U.S. Treasury Bonds have held a AAA rating ever since the rating agencies were created and started rating bonds. United States Treasury Bonds have always been considered the icon of safety and security. Their yield has always been always been characterized as the risk free rate of return. Historically, no security has been considered safer than a U.S. Treasury Bond.

Downgrading U.S. Treasury Bonds takes us into unknown territory. It’s that unknown that causes investors to panic. Panic ruled the day today with stock investors taking the Dow Industrials down another 634 points on top of the 513-point loss last Thursday. This puts the market down over 1900 points in 12 days.

This extreme drop in a short amount of time with the bulk of it happening over two days. This type of market action is virtually impossible to avoid by moving to cash. It was driven by politics and occurred so quickly that there was no time to react and move to safer assets.

On a chart this drop is extreme, which puts us into very oversold territory.

Often, when you have moves this extreme, either upside or downside, they are followed by extreme reversals. The problem is that nothing is guaranteed, and you don’t know that for certainty. All you know that the probabilities favor it.

A hard and fast sell off out of nowhere, like the one that we have just experienced, creates a quandary for investors. They consider selling because they don’t want to see their account go down anymore. If they absolutely knew that the market was going to keep going down then it would make some sense to sell.

However, they know that selling into a panic is usually a mistake, because it locks in their losses and hurts their long-term returns.

On the positive side, stocks are not overvalued like they usually are when you have a bear market. A combination of falling prices and rising profits has pushed stock valuations 20 percent below historical P/E ratios. More than 75 percent of corporations in the S&P 500 index exceeded their earnings estimates in the second quarter. In total, corporate earnings are expected to rise 18 percent in 2011 and 14 percent in 2012 (recent Bloomberg studies).

According to another Bloomberg survey, chief strategists at 13 of the largest banks still see the S&P 500 ending the year around 1400, which would be 25 percent higher than it closed today. While I’m not that optimistic, it is positive that they see fair value 25 percent higher based on corporate earnings.

Another positive is that fear and panic hit extremes today.

The VIX closed today at 48, which shows extreme fear. Historically, 42 on the VIX has been a level where markets reverse and start to rebound. The 2008 bear market was the only exception to that rule that I know of.

The negative side of the equation is made up of macro issues.

1- Europe has a debt mess that is trying to sort out and yet to do so.

2- Economic growth in the U.S. is slowing. Most economists don’t believe that we will see a double dip recession, but that is currently a concern.

3- Politics and our debt are creating uncertainty for investors.

4- Panic is currently ruling the markets. Even though the markets are severely oversold and undervalued, there is always the possibility that they can become more oversold. That short term selling pressure can be unduly stressful if your risk tolerance is not correctly set.

Is today’s market action creating a buying opportunity over the next one, three and five years? Or should you be selling? If you think prices will be lower over the long term or you need the money right now, then maybe you should sell. If you believe that prices will be higher one, three or five years from now, then this may be a buying opportunity.

My best advice is to stay focused on the long-term. Generally, decisions made in a panic situation are bad ones.

If you have questions or concerns, feel free to call us at 800-748-4451 or email us (dave at paragonwealth.com, nwhite at paragonwealth.com).

Disclaimer
Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.  

Ugly Thursday

Posted August 4, 2011 by admin. tags:Tags: , , , , ,
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 photo by Associated Press

Written by Dave Young, President of Paragon Wealth Management

The Dow Industrials dropped 512 points today. It is the worst point drop since 2008. Over the past 10 days the Dow has lost 1341 points or about 10 percent of its value.

Why have we seen these steep losses in such a short amount of time?

As we’ve seen in the past, it starts with our “leaders”. President Obama and his Senate seem to have one focus. Their focus has been to spend every dime they can find. This administration has taken government spending to an entirely new level. Unfortunately, when they can’t find any more money, they borrow it from our grandchildren and keep spending. That mentally has put us 14 trillion dollars in debt.

The House of Representatives told the White House and Senate to slow down the spending spree before they bankrupted us. A new player in politics, the Tea Party, took the position of an interventionist to an alcoholic. They told the entire group to stop their spending now.

No more compromises, no more kicking the can down the road… Just stop now. 

All of that drama started the market tumbling initially. We anticipated that once the politicians did something, anything, the markets would recover. Our belief was that the initial sell-off was artificially caused by the debt limit drama. That made it very difficult for us to sell and raise cash. Raising cash is the last thing you want to do when you expect the market to snap back to the upside. Surprisingly, after an initial jump higher the morning after the agreement, the market continued lower.

Essentially, the debt agreement gave more money for Washington to spend in the near-term for a promise to cut spending later, once someone else, “a committee” figures out what to cut. Apparently that wasn’t enough to soothe the markets.

Unfortunately, then Europe decided to join the party. Investors decided that Spain and Italy weren’t getting enough of a bailout so the European markets started selling. The European markets closed down hard, right before our markets opened yesterday and today. That was enough to send everyone into a panic. What happens when you panic? You sell.

So where does that leave us?

On the positive side, investors “usually” buy stocks because of the earnings power of the stock they are buying. Corporate earnings are the highest they have been in four years. Corporations have generally been “knocking it out of the park” with their earnings. Corporations are lean and mean and very profitable. Stock valuations are very good. So in theory, stocks should be gaining in value.

At the same time, we have a weakening economy, high unemployment and inept politicians in charge. These factors all throw fear and uncertainty into the equation. Fear and uncertainty usually translate into selling.

But at some point, we run out of investors who are selling because of their fear and uncertainty. At that point, when the sellers are exhausted, buyers will enter into the picture and start buying up the bargains that exist… because of the reasons listed.

The problem is that no one rings a bell to identify when the selling has ended. We do know that stocks are 10 percent cheaper than they were 10 days ago, and there are a lot of reasons to buy them. Over the long-term, this should be a good buying opportunity. In the short term, it’s anyone’s guess.

At these prices, it seems that stocks have already priced another recession. Our data indicates that the last few months have just been a soft patch in the economy and the second half of the year should be much stronger.

We don’t see a double dip recession ahead. 

The problem is that if everyone scares themselves to death, then the fear could gain momentum and create a self induced recession. It would be unnecessary and we don’t think it will happen, but it is possible.

In the end, recent corporate earnings have been exceptionally strong, investor sentiment is very negative (which is good for stocks) and market valuations are low. Overall, these are usually positive indicators for the stock market.

We will continue to follow our models. Stay tuned. 

Disclaimer
Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.  

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