Due to the volatility in the markets over the past few days, we wanted to reach out and let you know of our thoughts and the actions we are taking. We have been saying that this sell-off is long overdue for some time. It is the reason we have been holding a lot of cash and have been more defensive in our portfolios.
•Monday morning dramatic drop (which will be repeated endlessly by the media) was an aberration as most stocks were not open for trading yet. Prices quoted were not actual bids and offers in many cases. Many stocks and ETF’s did not open for trading until after the first half hour. It was panic selling that was very mispriced.
•Overall, this is a healthy event for the market as it lets off much needed steam
•This downward move helps to take risk out of the market
•In the short-term, we are buyers but will move cautiously as we watch how things play out
•We have been selling some positions that have tax losses and adding commensurate exposure in other areas
•U.S. economy is in same situation as before which is fine but not great (nothing has fundamentally changed from one week ago!)
Although the current volatility creates short-term opportunities, there are still things that need to be worked out for the bull market to continue higher longer-term:
•China: The Chinese economic slowdown has dramatically affected commodities. The weaknesses of a command-and-control style of government has become apparent in the government’s futile attempts at controlling financial market moves lately. The devaluation of the Chinese currency is negatively affecting emerging market currencies and finances with some similarities to the 1998 Asian currency crisis. All of this is basically an adjustment as China got ahead of itself economically and now has to retrench and absorb the excess as their economy changes.
•The FED: Our central bank is boxed in a bit trying to move off of its historically accommodative monetary policy as the unintended consequences will have to be dealt with and priced in by equity and bond markets.
•Slowing corporate earnings growth: slower, but still growing, earnings were making the market a bit stretched at the prior valuations. Market corrections help to mitigate this risk. Fourth quarter earnings will come in higher on a comparison basis and in contrast to the prior three quarters.
Going forward we will be watching how the market reacts with an eye to opportunistically sell on the rallies and buy on the dips as the “Adjustment Period” we have been calling for continues.
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.