Holiday Volatility

Greetings & Happy Holidays.

Historically, December is the 2nd best month of the year in the US equity markets.The market is usually quiet on low volume as most of us spend time with family and the year winds down.However, as we stand today, this month will go down as the worst December in the history of the stock market.The selling has been widespread across the globe and has left most indices in bear market territory, ordown 20%+.Cash is outperforming over 90% of all asset classes this year.

What’s going on?Around here we often say ‘The Market doesn’t care….until it does’.In other words, rising/bull markets tend to brush off concerns until they don’t.Over the past few weeks almost every issue has been met with selling upon more selling.And downside momentum can lead to panic selling and forced liquidations.That all feeds on itself and the next thing you know we’re down 15-20% and everyone is wondering which shoe will drop next.This month has been brutal and this week has been a bit scary for most investors.

What are the most cited concerns out there?There are many:China slowing down, global growth slowing, trade wars, tariffs, Trump’s tweets/behavior, year-end tax selling, the mid-term elections, the Mueller investigation, among others.All of these issues are fairly well-known, but taken together, we get a ‘panic sell’ environment.

For the last many months, the markets assumed the Fed would raise interest rates this week.Fed Chairman Powell had telegraphed the rate hike for a while and he did raise the Fed Funds rates by .25% Wednesday afternoon.The Dow Jones was +300 after the announcement but quickly reversed almost 900 pts by the end of the day.

We then fell another 500+ pts yesterday as our elected officials are playing ‘chicken’ with our government and a likely government shutdown before the Christmas Holiday weekend.And then our Defense Secretary Jim Mattis resigned unexpectedly.The hits just keep on coming.

Markets tend to ‘take the stairs up and the elevator down’.The S&P500 closed at 2470 last night.It took over 14 months to climb (the stairs) from that level to the recent September highs.It taken less than 3 months to fall 16%.

Where does that leave us?The selling has been indiscriminate and widespread.The International markets, Emerging Markets, US Small caps, and the Nasdaq are all down well over 20% from their highs.

This week looks very similar to the sharp 19%ish pullback in July/Aug of 2011, Aug of 2015, Jan/Feb of 2016 and Feb/Mar this year.We are seeing very similar ‘washout’, panic selling readings across most all metrics.Could it get worse?Yes, anything is possible.Could a recession be imminent?Yes, but we don’t’ see it and most objective analysts agree.

We believe this very sharp, unexpected selloff is another ‘cyclical’ bear market in the midst of a ‘secular’ bull market.In other words, the long-term trend is still in our favor and these last 2+ months are part of the market process.

The economy is slowing a bit and everything cited in the 2nd paragraph above is arguably a cause of that slowdown.But that doesn’t mean we’re on the cusp of a recession.The Fed does not want to kill the economy.Nor do our politicians.The government shutdown will work itself out, as it always has.

Corporate earnings growth is still solid.Unemployment is low, the government is spending, banks are lending, small businesses are hiring.There is a saying – ‘The financial markets have predicted 9 out of the last 4 recessions’.Markets overshoot, both up and down.This volatility, however painful, is typical.It’s normal.It’s an opportunity for the long-term investor.

Granted, there has been a lot of ‘technical damage’ done.And it will take great patience and, likely, several months for the markets to find more solid ground.But make no mistake: Institutions and long-term investors love this market right now.They’re getting the chance to buy Apple down 30% lower than a few months ago.The banks have been decimated.Energy stocks too.Most sectors have been crushed.Selling here makes no sense.Most all technical and historical stats support this.

What if we’re wrong and 2019 is going to be like 2008, one of the worst years ever for equities?That year the S&P500 fell by roughly 38%.But it is worth keeping in mind that we had 9 rallies of at least 9% and 3 of those were rallies of over 20% from washout lows.Point being selling right here, right now, makes no sense.Negative sentiment (fear) is stretched and we’re due for a rally as investors take advantage of low prices.

For our more conservative core accounts, we sold bonds and bought stocks yesterday with the Dow down over 1100 points for the week.We did the same for more aggressive accounts earlier in the month.

Again, these times are never fun and they can certainly test emotions, resolve, and investment plans.They key is to recognize those emotions, take a step back and realize many others have sold because they’re scared.That’s why prices are down.And selling when prices are down is never part of a sensible investment strategy.

Thank you for the opportunity to help you. We wish you and your family a joyous, healthy and safe Holiday Season!


Your LJI Team