This Too Shall Pass

This Too Shall Pass

So far the New Year has not been a “happy” one for investors. All of the major stock markets are in negative territory, but the major themes have not changed with the New Year. The same issues putting downward pressure on stocks in 2015 are simply extending into 2016.

From a thirty-thousand foot view the primary themes continue to be:

1) Commodities: Oil prices have been hit hard due to a glut in supply and a reduction in demand. Copper, aluminum, etc. have also suffered due to a lack of demand, particularly from China, the world’s biggest consumer of many commodities.

2) Interest rate uncertainty: Although the Fed did raise interest rates in the latter part of last year, there is still some apprehension as to whether they will be able to stay on track in 2016. They’ll need to see continued improvement in GDP growth and signs of rising inflation to keep up the pace of raising rates.

3) China hits the brakes: Arguably, China may be the biggest contributor to slower global economic growth. The country remains an economic driver for the world, but it is winding down years of excess investment.

We realize that this is not fun, but in the grand scheme of market cycles and investing, this is absolutely normal. I think the fact that this is occurring in January, which is not so typical for the start of a new year, just exacerbates the situation.

The global markets are doing what they always do during these major market shifts – digesting. And during this digestion and processing of information there is inevitably going to be some volatility.

It may surprise you that over the last twelve months (01/13/15 – 01/13/16), the S&P 500 was actually down more in August of 2015 (-7.7%) than it is today (-6.5%).*  

These headwinds are temporary, and as the saying goes, “This too shall pass.”

The underlying performance of the U.S. economy is quite good as indicated by the Fed’s decision to actually raise rates. Clearly we are experiencing some economic expansion and corporate profits are continuing to grow. There is much to be optimistic about in the long-term.

During times like this, it’s always helpful to review some of our core investment principles:

1) We believe that over the long-term markets will be higher in the future than they are today. This is why we invest.

2) We accept that stock markets are volatile. We are willing to accept this volatility because we know that there is no better performing asset class over the long-term than stocks. For our more risk averse clients we keep a significant chunk of the portfolio in bonds to help mitigate this inevitable volatility.

3) We stay globally diversified across many asset classes because this gives us the best chance of reaching our expected rates of return over time, and helps to dampen risk.

4) We are all long-term investors. If you are retired and in your sixties or seventies, it may seem like it’s too risky to be invested or that you don’t have time to recover from market downturns. The reality is you could live another 25 – 30 years, and your bigger risk is not being invested for growth to support your lifestyle.

5) And last, but not least, you cannot time the markets. No one can consistently and successfully time the top or bottom of the market, and it’s not rational to base an investment strategy on predictions or forecasts.

I want to expand on this last statement because investor behavior is so critical to the success or failure of a strategy. You may be reading the financial headlines and letting your emotions get the best of you. It’s important to resist the urge to try and do something when we all understand that market volatility is normal.

The “sell everything” type of headline story has absolutely no value and should be looked at as pure entertainment. These articles are the worst kind of bottom-of-the-barrel quality that have caused irreparable damage to so many investors over the years.

Let me highlight some of the market “gurus” comments on this recent market pullback. And these are just from this week’s headlines:

So who’s right and who’s wrong? Believe me, their opinions change with the wind. You can drive yourself crazy listening to this stuff. I know these people get paid to have an opinion, but it’s best to just tune it out. These pundits cannot predict market movements any better than I can tell you what the weather will be like the second week in March.

We base our investment strategy and behavior on time-tested evidence, research and analysis, historical markets, and the belief that stock markets will continue their perpetual upward trend, in spite of these temporary bumps in the road.

We are confident in our strategy and the construction of the portfolios, and these recent events have no sway on our thinking long-term. Please call us with any questions or concerns. We are always here to listen and help.

*Source: Stock Charts website

Mike Minter

Mike Minter

Mike develops investment portfolio allocations, handles trading and rebalancing, and conducts research and analysis as a Portfolio Manager and Financial Advisor for the firm. As a perpetual student of investing and the markets, Mike considers himself obsessed with the subject. Mike has earned the CERTIFIED FINANCIAL PLANNER™ (CFP®) and Certified Fund Specialist® designations. He is also an active member of the Houston chapter of the Financial Planning Association (FPA).

 
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