On the first market day of November 2015 the S&P 500 closed above 2100 for the first time since August, according to CNBC & Yahoo Finance. CNN Money shows on the same date that the year-to-date return (1/1/01-11/2/15) for this most watched index is 2.19%. So, where do we go from here? As observed by Mark Twain, “History does not repeat itself, but it does rhyme.” The future is never a mirror of the past, but according to Sara Shepard, “Those who forget the past are doomed to repeat it.” As Asian markets showed contraction, Europe gained, and US stocks closed higher by “nearly one percent or more Monday, the first trading day of November, helped by gains in energy and health care stocks,” according to CNBC. Bob Pisani went on to say that “October was up 8.3% making this the fifth best October since 1950.” What followed was a report that among the top 10 Octobers, the following month the S&P 500 was positive 78% of the time with a median return of 2.15%.
On the other hand on a CNBC Squawk Box interview, Mohamed El-Erian, Chief Economic Adviser at Allianz said on 11/2/14 he puts “the risk of a recession in the United States at 25-30%.” I couldn’t agree more with El-Erian’s statement, “The road we’re on is going to end. We cannot rely on central banks and central banks cannot be the only game in town when it comes to policy. By 2017, we’re going to tip only one way or the other.” Most of my peers hate working with engineers of all types. Engineers in general are not afraid of math, facts, and compelling arguments. Financial advisors are often guilty of asking potential investors and clients to look at the averages and hope for the best. In particular, aerospace engineers prefer to look at the worst case scenario to see how the risks of failure might be mitigated. This logic makes more sense to me. If you are prepared for the worst possible case, you may survive to tell the story, which can allow investors to be optimistic about their future.
The news tells us that stocks are soaring again. Yet, when we look closer we can see that sales projections and actual earnings are slowing. As Harry Dent observed on 11/2/15, “S&P 500 companies continue to report third quarter earnings. And it looks as though sales and earnings are set to decline. While sales have declined the past two quarters, we haven’t seenboth sales and earnings decline since the third quarter of 2009!” Dent says further, “In today’s economy, slowdowns aren’t an option. If a problem arises, central banks just whack it with more stimulus!”
“Bad news continues to be good news for the market on crack.” – Harry Dent
As the signs of more stimulus emerge in Europe and China, stocks rally. On 9/25/15 Thomson Reuters, however reports, “Third quarter S&P 500 earnings call for a 3.9% decline from a year ago, with half of the S&P 500 sectors estimated to post lower profits thanks to falling oil prices, a strong US dollar, and weak global demand,” according to Reuters. As Daniel Florness, CFO at Fastenal Company, an industrial distributor put it on 10/14/15 at zerohedge.com, “The industrial environment is in a recession. I don’t care what anyone says, because nobody knows that market better than we do. You know, we touch 250,000 active customers a month.” Opinions are like belly buttons, everybody has one. But that’s what I call a qualified opinion.
There are times to take advantage of the market environment and times when the priority is simply to avoid market downside participation. This is why we believe investors may be better off taking a flexible approach to investing. Growing numbers of financial advisors feel it is critically important to bring investors the best resources and best information available in the marketplace so that together you can build an investment strategy that is well-positioned to accomplish your goals. Markets can be highly volatile, and the more volatility, the greater the potential impact on your returns. Look for advisors who are organized and positioned to provide strategies that allow investors to navigate through both smooth-sailing and stormy markets with confidence.
As we know, volatility has returned to the stock market over the past 15 years. During this period, the market has frequently moved sharply up or down. And we of course remember how the market drop from late 2007 through early 2009 felt. Now imagine you had to take some money because you needed income. Have you determined what it would take for your original investment to get back to even? There is no time like the present to look at your situation.
Nobody likes losing money, and this graphic illustrates one reason why. Once a portfolio loses 10% of its value, it takes 11% just to get back to break even. With a very large loss, this effect is magnified: A 100% gain is required to erase a 50% loss. If for any reason, on top of a 50% loss there was a 10% withdrawal, that makes your drawdown -60%, in which case you need a gain of 150%. Do you like those odds? If you moved from risky assets to cash or cash equivalents and stayed there, would you have ever gotten back to even?
Rather than buy and hold or hope for the best, there is a different, smarter approach to portfolio management that leads to great conversations with investors. This approach;
1. Defines risk as an investor’s maximum loss threshold.
2. Recognizes investors experience risk as moments-in-time.
3. Varies equity market exposure with equity market risk.
4. Evaluates diversification in the context of market extremes.
5. Emphasizes current market environments.
The buses you don’t see
Start by stress-testing your portfolio and set range expectations. Create your personal benchmark based on your personal risk assessment. Analysts don’t see the slowdown of the affluent sector, where you dear reader, comprise “the top 20% who control over 50% of income and spending,” according to HS Dent Research. As we have shown here, this group peaks at age 53-54 in 2015-16, and the group holds almost all of the financial assets including real estate and stocks. Quantitative easing has benefited you and those in your circle. But nobody knows how this will end. It may not be pretty. Analysts don’t see that car sales, for example, also peak with this affluent sector at age 54. Keep your eye on the China ball, which is the second largest economy in the world. China may have a hard landing with its economy, the stock market, and real estate. And don’t forget the European strong house, Germany in the third quarter, there may be the beginning of a much larger declining trend line, with an aging population.
Bubbles can get quite large before they burst. But they always burst. Governments may be able to fool Mother Nature for a while. But Mother Nature always holds the trump card. As basketball great Charles Barkley likes to say, “I could be wrong, but I doubt it.”
By John Grace
Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser. Investors Advantage, and NPC are separate and unrelated companies. The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by NPC. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual's goals, time horizon, and tolerance for risk. There are no guarantees that any managed portfolio will meet its intended objective. Neither asset allocation nor diversification can ensure a profit or prevention of loss in times of declining values.