Thoughts On Yesterday's Decline.

I'm on the road visiting clients in Florida so I'm breaking in from our scheduled review of our winter letter with a quick thought that I sent out late last night to clients.  Here's my thinking on what's happened to stocks these past few days.

I am traveling these next few days visiting clients so this is being written as I travel on the road on my IPad. In the interest of time it is not as polished as I would like.  You may see an updated version of this in a few days as conditions warrant.   I want to get this to you before the open tomorrow.  I left for Florida Saturday morning to see clients early in the week, but not before posting this below {highlighted in bold} to my blog Solas!:

"Yesterday's action will surely bring out the headline seekers.  Most major indices lost between 2-3% by the time we rolled into the weekend.  My guess, and it's just a guess, is that we'll at a minimum have one more bad day on Monday or at least start lower.   The markets had built up a bit of froth and this is as good a way as any to let loose some of that steam.  Yesterday's trading has actually taken us from a short-term overbought condition to oversold so that could mitigate some of the damage next week.

The important thing to watch is how markets react when the inevitable counter rally kicks in.  A market that either can't quite reach those old highs or makes it back up there only to not have the juice to make carry itself higher is possibly trying to change it's trend.  We'll just have to see.  

One last thing.  This decline so far has only taken us back to about where we traded in Mid-January."

I walked into a meeting this afternoon and was greeted by the glum announcement that the market was down 1,000 points.  I'd assumed the person I was meeting with meant down 1,000 points from the high last week but he quickly assured me he meant today.  Since stocks were down substantially less than that when I left, it was obvious the tone of things had changed since the morning when I started a three hour drive up to Vero Beach! I don't know yet why we had such a collapse late in the day, but I can say if you read what I posted over the weekend that some sort of decline today didn't take me completely by surprise.  Perhaps the magnitude of the loss in points wasn't expected, but not the decline itself.  If you read my last client letter or the post from this weekend, then you knew such a thing at some point was possible.  So the basic question as always is what comes next?

First, as we've stated before, the press is going to highlight the decline in points but on a percentage basis we've lost only about 6% from January's highs.  Such a percentage decline over a few days time is not that unprecedented, particularly one that begins on a Friday and carries over into the beginning of a week.  What's happened so far is we've wiped out 2018's gains, which only means we've wiped out January's gains.  That's right, all we've seen happen is that January's parabolic move higher has been erased.  If you received an account statement today you would likely be about where you were on December 31st.  Volatility has returned but so far all that has meant that most investors are back to where they were about 35 days ago.  

My guess, and it is another guess at this point, is that markets at a minimum will have one more bad day or at least a bad open.  The speculative froth has to be knocked out of investors.  Today probably did a pretty good job of that.  At some point we'll see buyers come back and then, as we said on Saturday, we'll need to see how markets react on the next rally.  

It is said of bull markets that they take an escalator up when they're moving higher and an elevator down on the decline.  The last few days have been proof of that.  Stocks have now rapidly moved into a short-term over sold condition.  In such conditions stocks will at some point find a level from where they can rally.  We will evaluate  whether there is value at those levels and if so we will put funds to work in client accounts.  Irregardless of the last few days, none of the longer-term positives we discussed in our winter letter to you have changed.  Likewise we will also see how markets react in their next rally attempt to try and figure out whether or not the character of the investment psychology has changed.

We told you in our last letter to take your December or, if you prefer your January account statements, and lop off 10%.  Stock's recent trading has shown this can happen faster than most people expect, especially in a enthusiastic market like we've recently seen.  With volatility obviously returning in the early months of 2018, we need to talk if you think anything has changed in your risk assessment of things.  This is especially true if the past few days have caused you to reevaluate how you feel.  As I've stated before, I think markets can be higher over the next 6-18 months but I think we're going to see much heightened volatility in 2018.  

Finally if you have friends or family who need help with their investments or are concerned by what they see right now then we are happy to talk to them.  We can discuss what is going on right now and how to invest in today's markets.  Sometimes simply speaking with somebody who understands how the markets work and is a financial advisor can help investors feel more confident and less concerned with the day-to-day market activity.

Hope this helps explain the headlines!