When Smart People Do Stupid Things
- What this means to your portfolio
History is littered with smart people doing stupid things. This week we had another headscratcher.
All investors wanted for Christmas was for the Federal Reserve to announce after their December 18/19 meeting that they would take a wait and see approach to raising rates next year, rather than mechanically increase them at predetermined intervals. Makes sense, right?
Nope. Fed Chairman Jay Powell played Grinch and pulled the tree out from under us. Following their meeting they announced they are going forward with scheduled plans to raise interest rates at least 2 more time next year. The stock market absorbed this news in prudent form and quickly started selling off again.
I said we would take decisive action in portfolios if I didn’t hear what I wanted to hear and we did. You’ll be happy to know that following the press conference, we made portfolio adjustments, and we stand ready to take further action if necessary.
What the smart guys at the Fed did was just plain stupid in my opinion. Announcing that they would raise rates again next year made them look out of touch. A simple statement that they were watching things closely and they would take a wait and see approach and adjust if necessary is all the market was looking for.
As I was wallowing in my own pain and sorrow over this decision, I found a bright spot. Two in fact.
The first being that this could very well be the capitulation I was looking for, and the buying opportunity of a lifetime. At the very least it appears we are in a bottoming process.
The 2nd is that the economy is rock solid and I don’t think stocks are going down due to impending economic doom. I understand that the declining stock market has us worried, and no one wants to be caught with their pants down like 2008. However, none of the signs of an impending economic disaster are present.
The prime mover of stocks is corporate earnings and earnings growth is still expected to be very good. Bank lending, remains very robust. A good indicator of trouble ahead is when banks tighten their lending practices, and there is no evidence of that. The opposite in fact.
Valuation is actually a bargain at current levels as PE ratios (price to earnings) are only at 15 times earnings. Well below the 17x average. Unemployment is very low and expected to get even tighter, and there is no sign of runaway inflation.
So is this the bottom? Only time will tell but sure does feel like it. No one feels good about the market right now and that’s a good sign. We’ve all been here before, we just forget. The good news is that this correction is shaking out all the poor and inexperienced investors, and once it’s over we should see a very strong rebound.
You’re not alone as there has no place to hide. Every sector has been hit hard.
Stocks especially. The S&P 500 is down about 16% from the high. Not quite the “official 20%” associated with a bear market, but a deeper look reveals otherwise. The Nasdaq, Russell 2000 and the transport indexes have gone down by over 20%. Furthermore, the large majority of stocks within the S&P 500 have fared much worse. 250 stocks are down 20%, 162 are down at least 30% 113 are down at least 40% and 69 are down at least 50%, according to Marketwatch. These are extreme numbers.
What makes things even worse is that there is almost always some way to make money, but not this year. Every asset class one can invest in from US stocks to equities around the world to gold and commodities to government and corporate bonds have posted negative unchanged returns for 2018. Even during the last crash 2008, U.S. Government bonds and gold worked.
So what does this mean to the market and your portfolio?
I think we have been in a bear market since the summer, and, more importantly, that we are almost out of it.
….and that’s a good New Year’s present!
Although next year may start off rocky, I think 2019 is going to be a good year!
I was planning on this just being a warm Christmas letter wishing you and your family a happy holidays. However, I hope you don’t mind that, once again, I have had to address the investment climate due to market conditions.
Whew, OK. Now I can say it.
From all of us here at Springer Financial Advisors we wish you and your family a happy and healthy holiday season!
P.S. Be on the lookout for the Santa Tracker info from me on Monday so you can track Santa’s movements on Christmas eve.