Summer Volatility

Hello and a belated Happy Labor Day.

Six weeks ago, as the major indexes were hitting all-time highs, we sent out a note relative to inevitable market cycles.Eight trading days later the S&P500 was down over 6%.Several sentiment gauges were showing peak fear and, with the Dow down 800 points, we stepped in and added equity exposure in our core accounts.

That day, August 5th, happened to coincide with the S&P500 lows for the month.The markets spent the month in a fairly tight trading range as those 8/5 lows were ‘tested’ four times.Late in the month the Russell 2000 (small cap index) bottomed as well, off almost 10% from the July highs.

Per usual, the headlines were universally negative.Global interest rates cratered and caused an ‘inversion’ in the yield curve.A Yield Curve Inversion is when shorter-term interest rates are higher than longer-term interest rates.The playbook says that means growth is slowing, and a recession is on the horizon.Could that be something to worry about?Sure.Is it a sure sign of imminent financial ruin?Absolutely not.They say the bond market has called 7 out of the last 4 recessions.In other words, bonds aren’t always right – that market overreacts too.

“There is a 100% chance of a recession coming” – Jamie Dimon, CEO of JP Morgan, May 8th, 2018

Keep in mind Mr. Dimon wasn’t predicting anything on the immediate horizon.He was stating a fact: We’re going to have another recession.Recessions happen – that’s how economic cycles work.We overshoot, readjust, and so on.

By definition, a recession is when our Gross Domestic Product (GDP) falls two quarters in a row.Part of the problem in trying to identify one is, also by definition, by the time it’s confirmed you’re in one, we’re already nine months deep.Usually, by then, the financial markets are discounting an economic recovery…news is still bad, but the recovery is well under way.

We’re not in the economic forecasting business and you shouldn’t be either.It’s futile and, often relative to the equity markets, there is no correlation.

As of six days ago the US market had grown by exactly 0% over the previous 20 months.Sometimes, that’s how things play out.Markets sometimes move sideways for 12-24 months (or longer), during a long-term uptrend, and can wear you out.

The key is to NOT let frustration or ‘expert’ talking heads deter you from a long-term investment plan.It also helps to stay patient (near highs AND lows), plan for volatility and raise/lower exposure accordingly.

Over the last few days, ‘news’ of progress on the Chinese trade talks pushed the markets out of that frustrating August trading range and, once again, we’re approaching the July market highs.Right now, we’re less than 2% below those all-time highs.If the two-ish year pattern holds to form, we’ll grind higher from here and break thru those July highs this fall.The news will suddenly turn very positive…and we’ll see where things take us.

One final thought on interest rates.But first, imagine a world where there are 10 banks in town and you’re looking to put $100k into a CD.One bank is paying 2% for 2 years and two are paying 0%.Now imagine, with the other seven banks, if you give them $100k they’ll give you $98,500 back in two years.In other words, you’re paying the bank to hold your money because interest rates are negative.

That bizarre scenario is the global interest rate environment we find ourselves in today.Most of the globe is offering negative interest.Here in the US, you can still get 1.5-2% on your ‘safe $$’.The US is that ‘one bank’.So, if more $$ is coming into our financial markets…thus, pushing rates down…we don’t call that recessionary or a reason to fear our economy.Money goes where it’s treated best.We call that rational.

And don’t let anyone ever tell you they KNOW how this negative interest rate scenario plays out.It’s never happened before.Never.No one knows.So, let’s not assume it will end horribly.Bad things have a way of not happening when it comes to the markets. For a performance history of the S&P 500 through Bull and Bear Markets, click here.

In the meantime, we’ll continue to monitor sentiment readings (fear vs. greed) and help navigate the noise on your behalf.Please never hesitate to reach out with questions or concerns.

Thank you,

Your LJI Team