Greetings & Happy Summer
Here in central Indiana it felt like it rained every day this Spring and then, suddenly, July brought a heat index of 110. Similarly, after a brutal 20% selloff in the US Stock Markets during the Q418, the major indexes have rallied back to all-time highs this month. Please click here
The recovery, while welcome, has been swift and has confounded many professional money managers. In fact, thru the 1st half of this year, the gap between the average actively managed mutual fund’s performance vs. the S&P 500 is the widest since early 2012.
The bottom line is pullbacks – especially those of the 20% variety – are painful. They’re painful for both investors and professionals. It seems most headlines, financial or otherwise, are typically negative. Negativity sells. When the stock market falls sharply not only do those headlines become more negative but us humans tend to believe them. Fear becomes real, investors panic-sell to get in front of the next ‘crash’, and well, you know the drill by now.
Ultimately, at some point, as prices drop, longer-term investors and institutions step in and buy assets on the cheap. The panic subsides, buyers continue to show up, the world doesn’t end, the news gets better and the pattern reverses.
So, with the markets near all-time highs, does that mean the Q418 fears were invalid? Not necessarily. The concerns back then were interest rates rising (they’ve dropped by 35%+ since then), China slowing, trade wars/tariffs, political turmoil, and recession fears.
Around here we like to say ‘the stock market doesn’t care until it does’. We would argue those issues are not only valid but are ever-present.
Where does that leave us? We always lean a little cautious. We entered 2019 with the heaviest exposure to equities in several years. We have since lightened up a bit having purchased several times in Q418. We believe that is prudent.
It’s worth a reminder that the US stock market is up roughly 4% in 18 months. We’re not exactly in the middle of a runaway bull market. So please don’t let FOMO (Fear Of Missing Out)set in.
The economy is strong. Unemployment is near all-time lows. Banks are lending. But things are never perfect. If they were, the markets wouldn’t be pricing in a 90% chance of a Fed rate cut next week.
Volatility is always lurking. Navigating the markets is never easy but we’re confident the markets will eventually ‘overshoot’. When that happens, the headlines will heat up again and give us a solid opportunity to take advantage of lower prices. Until then we’ll be patient. The ‘fear vs. greed’ cycle is as old as time and will continue as long as us humans invest.
Sincerely, Your LJI Team