Market Commentary by Joe Smalley, Accredited Investment Fiduciary®
Today, as I write this, it is the day after Super Bowl 52. The Philadelphia Eagles won a very exciting game. It came down to the wire and looked a lot like one of several other come-back games that Tom Brady and the Patriots have orchestrated in recent memory. But the 6-time champs came up short and the scrappy underdogs from Philly pulled off the victory.
And it was against all odds. Consider:
· Tom Brady has won more games than any other quarterback in the history of football
· The Patriots have been to more Super Bowls in the past 10 years than most teams have been to the playoffs
· The Philadelphia Eagles lost their starting quarterback in December and their backup quarterback played two really bad playoff games
But hard work, great defense, gutsy play calls, and execution when it mattered all combined for a winning formula. It turns out that when you have a plan, are prepared, stay focused and remain disciplined, Mission Impossible can indeed turn into Mission Possible.
Today, as I write this, it is also the Monday after a rally large Friday selloff in the stock market. The Dow Jones Industrial Average lost 665 points Friday as investors were spooked by the potential for rising interest rates to stem the possibility of inflation.
Translation: the market has been hot for a long time and the economy is improving, so the Fed will likely raise rates, which could cause inflation, so now might be a good time to take some profits.
And because the stock market rarely bottoms on a Friday, there is carryover selling today, with the markets down another 4.5%.
But let’s unpack why this is occurring. Consider:
· In March of 2009, the bottom was established by the financial crisis with the Dow closing at 6,443.
· Since then the Fed lowered interest rates and began extraordinary measures to boost the economy
· Asset prices, the economy, and the markets rebounded
· The Dow Jones Industrial Average hit an all-time high last month at 26,616
· Unemployment is still low, but wages have finally started to go up
· The Fed is seeing a boost in the economy due to tax reform
· All this is causing inflation fears because the economy is getting stronger
To be clear, we want the economy to improve. When the economy does well, most Americans do well. Jobs are good. Wages improve. Widgets are sold. Services are booked. Asset prices go up. Stocks rise.
The fear comes if the economy overheats and causes a bubble. If inflation runs hotter than what the Fed can do to tamp it down. Investors hate fear. And selling begets selling.
But most of the economic indicators like recession risk, market risk, margin debt risk, and technical data risk are flashing green right now. A couple yellow. But none are flashing red at this time.
The stock market runs in cycles. Boom. Decline. Bust. Recovery. We’ve been in the boom section of the cycle for quite a while. It’s healthy to have declines. In fact, we have had 599 one-day pull backs of 2.5% or more. And we will see more.
So, what to do when the market goes down? Oddly, the answer could be nothing. If you are in a well-diversified portfolio that consists of stocks, bonds, and cash, you may be able to ride out the storm.
The most important thing is to make sure you have your money invested for your time horizon. If you need money soon, by all means, keep it somewhere you can access it without a whole lot of volatility. If you have time to invest for the long term, the stock market might be appropriate, but only if you can handle the swings.
In this article from Tony Robbins which reminds people that corrections are normal, he quotes the legendary investor Warren Buffet: “the stock market is a device for transferring money from the impatient to the patient.”
In that vein, in order to capitalize on the old saying - buy low, sell high - you actually need to buy low.
To get through this or any downturn, have a plan. Stay focused on your goals. Be prepared. And remain disciplined. If you’d like to discuss your plan, give us a call.
Oh, and guess which movie trailer was advertised on the Super Bowl last night. Yep. The new Mission Impossible.
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