As we all prepare for the coming holiday I would like to thank all of our clients for the opportunity to be of service to them and the business they have provided us.
The market has been an interesting this year; setting new highs some 46 times, the end of quantitative easing, and interest rates still at historical lows. We are in uncharted waters since history does not show us similar conditions. I am still bullish and even though I see volatility coming back, any corrections should be muted.
I don’t predict markets but I think normal returns of 8 to 10 percent are expected next year. There is always the chance of a “black swan” upsetting the apple cart but proper allocation and diversification will mitigate the effects if it arrives.
In closing, we all should be thankful for the opportunity to live in this country. There will always be challenges and events that will concern us but all things considered I would think of nowhere else would I pledge my allegiance to.
Have a great holiday
Last Wednesday the market went through one of the most volatile days since 2008. Many people decided to go to cash and pull their investments from the market and hide. I continually preach against trying to time the market (going to cash when the news gets scary). However, I have come to the sad conclusion that it will always exist.
Since last Wednesday the S&P is up 6% and now trying to take out the all-time highs. Selling at the bottom is the biggest mistake I see investors make and it is what I always hear that causes people to stay out of the market. Volatility is back so we must adjust to it. Investors love volatility on the up side but run for the hills on the down side. I have never made money buying at the top but most individual investors will always try. Remember, it is not the portfolio 90% of the time that causes failure but the investors mentioned earlier.
Once the Federal Reserve finishes their meeting this afternoon we will probably see another round of volatility. I will admit this is concerning but we need to take advantage of the decision and adjust accordingly. My observation is there are a lot more positive results from this decision than negatives.
While Riley Wealth Management, LLC no longer has a custodial affiliation with Raymond James I have maintained a relationship with their energy research department and regularly read their industry updates.
Recently Raymond James Energy lowered their price targets on a few companies to incorporate a slightly higher risk premium given the depressed oil price environment. Specifically, they lowered their price targets on Legacy Reserves (from $32 to $28).
Several fundamental oil drivers have deteriorated over the past couple of months including: increased production from Libya and Nigeria, lower global oil demand growth assumptions and Saudi Arabia’s apparent willingness to allow global oil prices below $90 per barrel. In English that means their longer-term oil price outlook is modestly worse than before.
If you have any questions about how the price of oil may affect positions in your account please don’t hesitate to call.
Over the last four weeks we have been reminded that volatility and corrections still exist. Back in 2009, you could buy anything and it would make money, but now the rules have changed. The bull market is not over; in fact with this pullback, valuations now are very attractive. Everyone loves volatility when the market goes up but when it goes down fear looms its ugly head. Ebola, ISLE, and oil going down cause some unfounded selling. In fact, I had one client on Wednesday go to cash even though he was only down 2% with the market touching 8%. That was my first indication a bottom was forming.
I have written several times in the past that corrections are part of investing and this most recent was normal very orderly. However, after 40 years of investing I realize that there are people that just don’t belong investing in equities. In the back of my book I have my catch 22 list. The first question is “Do you understand how markets work”. Obviously, even with all my coaching; that client didn’t.
October 15 was quite a scary day for Wall Street with the index opened lower and plunged to its -3.04% in the early afternoon. The deepest intraday low since the -3.86% since the nosedive in November 2011. A buy the dip strategy subsequently kicked in with the index closed with a greatly trimmed -0.81% decline.
I hate to blame this on external factors but animal spirits rose with the Ebola scare exacerbating the fear. Economic and earnings reports are positive, in fact on the jobs reports unemployment claims came in with the lowest number since 2000.
You have heard me use the “history may not repeat itself but it sure can rhyme” saying many times, so looking back at march 2009 the S&P was down -7.40. All of you should know what happened since then. If you don’t then you need to call me and I will give you a quick review.
Corrections happen but discipline investing will always overcome and profit from them. There are a lot of things to buy now and these events like Ebola will become old news very soon. I have never made money buying at the high but buying at the low has worked pretty well.
Over the last two weeks the market decided to catch up; from no volatility to an unusual amount of volatility. Historically, it is not unusual to see this in September and October. However, we are just 3.5% off the all-time high of the S&P. This is not a correction; that would take a 7 to 10 % drawdown. The fears that are bothering investors really have no basis. In fact, there are a lot more positives than negatives in the underling economy.
With a three day weekend coming up maybe this will give investors a chance to reevaluate their positions and redeploy cash into what is now a much oversold market. I will be sending out a more in-depth explanation of the current fate of the market Tuesday. With the 10 year note at 2.3% why would you want to not stay in stocks?
The consolidation (which was expected) seems to be ending as I write this on Thursday afternoon. The minor pullback will be discussed as the week plays out. I even had a prospect call and see if we were getting out of the market because of the Ebola scare. All I know is stocks just got cheaper.
Historically, the fourth quarter has been very favorable for equities. In fact the S&P 500 has made more than half of the index gains over the past 25 years during the final three months of the year. Since 1989 the S&P is up 612% with 52% coming from the fourth quarter with the third quarter being the worst.
So here are three things that might make this a winning quarter:
- Sell in May goes the other way
- The Presidential Cycle
- The Santa Claus Rally
The S&P just extended is winning streak to seven straight quarters, and it’s reasonable to wonder just how long it can continue. Some investors are also worried that the Federal Reserve’s winding down its economic stimulus, or QE.
History is on our side and this pullback was needed.