It’s always a challenge to explain with any great satisfaction what’s going on “right now” in the stock and bond markets, and today is no different.
In a nutshell, the market is reacting to a Federal Reserve decision to raise interest rates yesterday and to continue the process of reducing the Fed’s balance sheet by about $50 billion per month by not purchasing new bonds to replace the existing holdings as they mature. Both of these actions amount to a tightening of liquidity and credit in the US economy. At the same time, the Fed sent the signal that it was becoming more cautious in its outlook for further hikes in 2019. While the Fed may have felt it was delivering a message that it was becoming more “dovish” (i.e., accommodative), the market clearly wanted more. With its mood clearly sour, the market’s angst is compounded by the China trade dispute and talk of a temporary government shutdown. Indiscriminate and program selling has ensued, and a “risk-off” attitude prevails.
This is the market in which we’re operating. With the exception of declines in some commodity prices and in stocks, most of the economic data is little different today than it was in September, when the market was in a very happy mood. Coincident indicators (which show the current state of economic activity) such as payrolls, industrial production, manufacturing and trade sales, look strong. Leading indicators, such as initial unemployment claims, hours worked, manufacturer and supply manager orders and building permits are also mostly flashing green. The leading indicators that are showing caution are the market prices for stocks, commodities and credit. It is quite possible that the markets, in the face of all of this other economic data— and which support the action “promised” by the Fed in earlier meetings and fulfilled yesterday—are wrong.
It’s also a challenge to know with any certainty how to react, as if a reaction is necessarily the best course of action. Most of our clients will see some stock trading in their accounts over the past several market sessions in our efforts to improve portfolio positioning, but we haven’t done any wholesale selling for a few reasons.
• First, we’ve been cautious in the face of rising markets and have been very careful not to spend the cash we have in accounts just for the sake of being fully invested. So there’s already quite a bit of cash in most accounts.
• Second, we operate with a philosophy—derived from decades of experience—that the returns gained over the long-term in any investment are determined by two principal factors: the quality and growth in intrinsic value of the asset we’re investing in; and the discipline to invest in the asset only when our analysis says it’s a bargain. We recognize that prices move around a lot in the short term based on many influences, but over the long-term our odds of having success are tied to those two principal factors.
• Third—and this was underscored in a video interview conducted this week with legendary investor Stan Druckenmiller on Bloomberg—controlling one’s emotions is the key to success as an investor. Druckenmiller illustrated the two most powerful but destructive emotions faced by investors. The first is that it’s really easy to sell at the bottom, take your cash, go home and instantly feel better (the emotional pain will hit later). That’s the fear emotion. The second emotion is that the “higher they (i.e., stocks) go, the cheaper they look.” Those who succumb to greed will also defer, but not escape pain over the long-term.
We know this note won’t give you complete satisfaction. Your accounts are down versus a few short weeks ago. While account activity shows us making decisions on your behalf, we have not stopped the bleeding. But we think we have the right philosophy and processes to fulfill our promise to you to make sound, careful and thoughtful decisions designed to make you better off over the long term. This may lead us to do more selling and/or buying in your accounts over the coming days or weeks if volatility persists, but even if there’s little activity, please know that we’re not resting through the holidays.
We encourage you to call in and speak with your advisor team anytime. We can talk to you about the markets, economy, and most importantly about your personal financial situation and progress toward your goals.