We don’t often send out correspondence based upon market movements, but since last Friday, things have gotten bumpy and we’d like to take a moment to climb out of the turbulence by putting things into perspective.
First and foremost, prior to the stock market’s swoon, we performed our disciplined portfolio rebalancing– meaning we sold stocks at their highs and reallocated to other parts of the portfolio that had become relatively underweight to targets.
We’d also like to dispel any notions that this latest market dip portends a sustained downturn and that stocks are to be avoided. The fact of the matter is that while this latest move has been violent, it has not been driven by deteriorating underlying fundamentals or economic worries that make us believe that we have much further to go on the downside.
Just like the fabled butterfly flapping its wings in the jungle, this latest flurry of selling was put into motion by one economic report that was released last week – the U.S. wage growth number… (take a deep breath: run-on sentence warning). The higher than expected wage growth number sparked fears of higher inflation; which caused bonds prices to fall and yields to rise; which caused stocks to fall due to worries that higher interest rates will crimp growth; which caused a popular stock volatility measure (VIX) to spike; which meant strategies that bet on the VIX staying low plummeted in price; which caused those bets to be unwound; which made the VIX spike even higher; which made stocks sell-off more due to computer models of other strategies that promised a smooth ride crying uncle. Whew! Got that?
Bottom line is that years of low-interest rates and extremely low stock volatility perpetuated the very thing that made the spike in volatility that we just witnessed possible – The actual underlying companies are doing just fine thank you! In fact, corporate revenues are up the most in years and growth is expected to remain robust. And those same bond yields that started this chain of events have come back down and look to be settling into a range that in no way threatens stocks!
While the recent losses seem dramatic (made even more so by the media), we are only just back to where we started the year – and its only February! Besides, we still have double-digit gains under our belts in stocks from last year.
BSW will remain disciplined. In doing so, our goal is not to avoid the turbulence, but to take advantage of it. We’d also like to make sure our clients avoid the queasiness associated with the turbulence, and by extension, the worry of not achieving financial goals. We have factored these types of periods into our individual client plans and projections of personal success rates. We, therefore, embrace them as they happen.
As always, thanks for reading.