What To Do Now
Markets worldwide were up at the open on news out of North Korea that they are willing to hold discussions with the United States on its nuclear weapons. If true, and not an effort on that regime to stall for further time, it would be a welcome development. Just as quickly as they were up on the open we've seen a sell-off since as tariff tensions again have come into focus. The last few days of declines was erased yesterday mid-morning as markets had become enough oversold in the short run that stocks had enough fuel to rally. So far there's been no follow through from the morning's start but the day is only half over so things could change.
Irregardless, I think it is important to recognize that we are in a different market regime now. The lazy halcyon days of market advances that have occurred since President Trump was elected for now seem to be a thing of the past. Volatility has returned and market day-to-day trading currently has no connectivity to it. Stocks can advance one day and give it all back on the open the following morning. Also, just when the bears seem to have the advantage over stocks we get these 2-3% rallies that stifle the negativity for at least a bit. In short right now neither the bulls or bears seem to have the advantage In that void volatility reigns supreme. If you've read some of what I've written recently then you know I think there's the potential for this to last for some period of time.
Given the kind of environment we're in I think investors need to do the following:
Accept that things may have changed. Accept that there's a higher probability that stocks are not going to go straight up like we saw last year. Accept that there's a higher probability of more volatility and that stocks may have seen there highs if not for the year then at least for some period of time back in January. Accept that consolidation of gains is part of the process and just because we are not going up right now doesn't necessarily mean the bull market is over for stocks. Learn to live with days where the major indices can drop 2-3%. Again understand this is part of the process and the press will play this up. A 500 point drop or even a 1,000 point drop today in the Dow Jones Industrial Average* gets a lot of headlines but doesn't mean what it once did in terms of percentage gains or losses.
Accept that you could take a look at your portfolio some time this year and see it down 10-15% or perhaps even more. A 10-15% decline is historically what has been considered normal volatility for stocks. It's been so long since we've seen that sort of drop that investors could easily be spooked if it should return or if we see something worse. A decline of that magnitude would not necessarily mean the bull market is over or that we are necessarily going to see a larger drop in stocks. Like everything else it would need to be viewed in the context of how it occurred. Just know this is possible and a much more probable event given the current trading environment.
Accept that things may be changing in terms of market leadership. We may not know if that's the case for many months. If so then there should be time to address such a change unless we get some unexpected event over the transom.
Use market volatility to your advantage to either rebalance or reposition your portfolio if necessary.
Know what you own or how your portfolio is set up. If the current volatility and more corrective conditions are keeping you up at night then you need to review your current risk/reward criteria. If you're one of my clients then we need to discuss this. If not, then talk to your financial advisor. If you don't use one then honestly look yourself in the mirror or hire me!
Finally I would also say that you should take care that you're comfortable with where you have money invested that you might need in the next 6-18 months. Choppy markets have a habit of seeing the most volatility when you might need the money the most. For example, if you have a child entering college this fall and you've been able to save enough to pay for your share of the bill, then you might want to make sure that at least the first semester's tuition is invested in something right now that won't necessarily be subject to a market correction. Of course this is an example and the situation will vary according to each person's needs. An easy way to evaluate this is ask yourself in terms of money you might need in the short term what hurts more. Would it bother you more to miss a 10% move up with money you might need soon or would the opposite hurt most? If losing that 10% stings the most then think about getting more defensive with that money.
As I've also written recently I don't believe the bull market we've been in since 2009 is over but I also think there's a higher probability of markets hitting the pause button for a bit. That is a normal part of the process. If your comfortable in that analysis then perhaps nothing needs to be done but a bit of rebalancing or repositioning as the year progresses. If you're having some trouble sleeping at night then the above steps might help.
Back later in the week.
*Long ETFs related to the Dow Jones Industrial Average as part of legacy positions in certain client portfolios. Positions may change at any time without notice.
Given the kind of environment we're in I think investors need to do the following:
Accept that things may have changed. Accept that there's a higher probability that stocks are not going to go straight up like we saw last year. Accept that there's a higher probability of more volatility and that stocks may have seen there highs if not for the year then at least for some period of time back in January. Accept that consolidation of gains is part of the process and just because we are not going up right now doesn't necessarily mean the bull market is over for stocks. Learn to live with days where the major indices can drop 2-3%. Again understand this is part of the process and the press will play this up. A 500 point drop or even a 1,000 point drop today in the Dow Jones Industrial Average* gets a lot of headlines but doesn't mean what it once did in terms of percentage gains or losses.
Accept that you could take a look at your portfolio some time this year and see it down 10-15% or perhaps even more. A 10-15% decline is historically what has been considered normal volatility for stocks. It's been so long since we've seen that sort of drop that investors could easily be spooked if it should return or if we see something worse. A decline of that magnitude would not necessarily mean the bull market is over or that we are necessarily going to see a larger drop in stocks. Like everything else it would need to be viewed in the context of how it occurred. Just know this is possible and a much more probable event given the current trading environment.
Accept that things may be changing in terms of market leadership. We may not know if that's the case for many months. If so then there should be time to address such a change unless we get some unexpected event over the transom.
Use market volatility to your advantage to either rebalance or reposition your portfolio if necessary.
Know what you own or how your portfolio is set up. If the current volatility and more corrective conditions are keeping you up at night then you need to review your current risk/reward criteria. If you're one of my clients then we need to discuss this. If not, then talk to your financial advisor. If you don't use one then honestly look yourself in the mirror or hire me!
Finally I would also say that you should take care that you're comfortable with where you have money invested that you might need in the next 6-18 months. Choppy markets have a habit of seeing the most volatility when you might need the money the most. For example, if you have a child entering college this fall and you've been able to save enough to pay for your share of the bill, then you might want to make sure that at least the first semester's tuition is invested in something right now that won't necessarily be subject to a market correction. Of course this is an example and the situation will vary according to each person's needs. An easy way to evaluate this is ask yourself in terms of money you might need in the short term what hurts more. Would it bother you more to miss a 10% move up with money you might need soon or would the opposite hurt most? If losing that 10% stings the most then think about getting more defensive with that money.
As I've also written recently I don't believe the bull market we've been in since 2009 is over but I also think there's a higher probability of markets hitting the pause button for a bit. That is a normal part of the process. If your comfortable in that analysis then perhaps nothing needs to be done but a bit of rebalancing or repositioning as the year progresses. If you're having some trouble sleeping at night then the above steps might help.
Back later in the week.
*Long ETFs related to the Dow Jones Industrial Average as part of legacy positions in certain client portfolios. Positions may change at any time without notice.
posted by CR English at 11:09 AM
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