The Unknown

“Why is the market going down?” “Why is my stock going down?” Those are common questions of late and almost everyone in the financial press has an opinion as to why: China’s economy, Italy’s budget, England’s exit from the European Union (BREXIT), elections, tariffs/trade policy, interest rates rising, etc.

The truth is, if the media is discussing these issues then they have already been priced into the markets. Look back at nearly every significant correction in the stock market and it’s the “unknowns” that generate true volatility (opportunity)…with the “truth” revealed only after a serious pullback has already occurred. February of this year is a great example. The week of February 5th the DOW dropped over 1,000 points, or -4%, on two separate days. In the moment, everyone was searching for the “why”. It wasn’t until the end of the week that we learned several massive hedge funds failed. Those funds dropped by over 80% that week and were forced to sell their holdings as they imploded due to excessive leverage.

Asset prices that week did not, and should not, matter to long-term investors. During extreme volatility it is important to remember we may never know the “why”. Volatility is the price we pay for growth over time.

Talking heads on CNBC/CNN/etc. all have opinions on why the markets do what they do. But they are only opinions and are largely a discussion of the known concerns in the markets and/or the economy. We should also remember the financial media exists to sell ads, not help anyone. See a few short articles below for insights on the media & volatility:

1.) Second Hand News

2.) History on the Run

3.) Future Testing

So, why is the market down this time? The simple truth is no one knows for sure. Stocks peaked (for now) in late September and volatility picked up the first trading day in October. The selloff has continued this month, but the October lows were not breached (a good sign, in our opinion). This week, once again, there has been a lot of commentary regarding how much “forced selling” has occurred due to the use of leverage/margin. Investors who trade on margin borrow money against their assets to buy more stocks. This works well in a rising market, but when stocks reverse quickly those margin buyers have no choice and must sell at any price. Throw in the fact that most “retail” investors sell low and buy high…and, fairly soon, we’re down 10%ish in a hurry and everyone is looking for horrible news.

At LJI we look to take advantage of these corrections. We use technical and sentiment indicators to make portfolio adjustments over time. We do not attempt to time the market, we are not perfect, and we do not attempt to predict the future. The goal is to be prudent, reduce volatility and take advantage of fear and greed at extremes.

Late last year various indicators led us to reduce equity exposure and move some money to bonds…we did so. On February 6th of this year we felt as though we were faced with a buying opportunity…we sold bonds and bought stocks. July 30th we saw similar readings of risk that we noticed late last year and thus moved 10% back out of stocks into bonds. The market continued to rise in August/Sept…but that didn’t last. In the midst of the most recent pullback (2nd week of October) we again exchanged bonds for stocks to take advantage of lower prices.

As things currently stand for the majority of our clients, our portfolios are “at target weightings”, based on their appetite for risk. Should the market rally from here, we are likely to reduce exposure again, at the proper time. Should the market fall further, we will be evaluating further buying opportunities.

Regardless of what happens, we attempt to make prudent, thoughtful decisions based on a variety of metrics. Emotions, while very real, do not dictate our investment strategy. Volatility is never fun but we plan for it and typically use it to our advantage. Either way, patience (and extreme fear readings) tends to payoff over time.

As always, please reach out if you have questions or concerns.


Your LJI Team