Wow! What a Ride!

First, a few facts:

  • Yesterday’s trading was volatile: After an initial climb, the Dow fell more than 900 points before recovering in the final 15 minutes—with no obvious catalyst—to finish down 1% for the day.
  • The S&P 500 has fallen in 16 of the 21 sessions this month, the most in a single month since October 2008. A 17th dip would be its most in a month since April 1970.

    The forward price/earnings ratio of the MSCI All Country World Index—which tracks performance across 23 developed and 24 emerging markets—has fallen to around 18, its lowest level since early 2016.

    On this day in 1929, the Dow Jones Industrial Average had one of its best days ever, rocketing up 12.3% to 258.47 as John D. Rockefeller, Sr. announced: “There is nothing in the business situation to warrant the destruction of values that has taken place on the exchanges during the past week.” The Dow went on to lose 84% more of its value before bottoming out on July 8, 1932.

We all know that trees don’t grow to heaven. We all know that markets fluctuate. We all know that bad stuff will happen in markets and that recessions are inevitable.

But this waterfall market drop of some 10% this month is a real doozy.

If we go back to the market collapse of October of 2008, a horrific event we all remember, think for a moment what preceded it.  Lehman Brothers had collapsed, Fanny and Freddie – two gargantuan mortgage providers – had failed and were in Federal receivership, Merrill Lynch, Countrywide, and many other large banks had failed.  The US and the world’s financial engines were imploding. And that month, the US stock market fell about 10%.

This October, I walk out my back door, I look up into a cloudless night and a starry sky. I hear no noise of war or chaos, armies are not marching in the street, financial markets are sound,  our unemployment rate is 3.7%, interest rates on 30-year US Treasuries are about half the historic, long-term average for bonds of that maturity, inflation is modest, and our economy grew 4.2 % in the spring quarter and 3.5% in the summer quarter. Are there troubles at home and around the world?  Yes.  But nothing resembles the shambles October of 2008. Yet our markets have replicated the collapse of ten Octobers ago.

Is a recession about to envelop us?  I don’t see it, because such data points as I mention in the preceding paragraph do not accompany the entrance of recessions. However!!! confidence is the life blood of investing, and events like we’ve seen this month do terrible damage to investor confidence.

If you are scared over what’s happened this month, then you’re human.  This is a scary time for any investor except for fools, madmen, and the most hardened of experienced investors who knows, every day, that the cure for low prices is low prices.

Most market falls have some explanations that offer some understanding as to why things are falling apart.  Oct. of 2008, we’ve covered above. The summer and fall of 2011 when the S&P fell about 20% could be attributed to America’s credit rating being downgraded.  The summer of 2015, there was the China scare.

But now? I guess all I can say is “Stay tuned,” as if this is a television drama which has been written for weekly viewers who enjoy terror.

But this too shall pass.  Patience gains all.  I hope my readers and investors will not do anything precipitously that would “book” the kind of losses we’ve experienced only on paper to this point.  For, as of today, unless you have sold into this madness, you haven’t lost anything.

God bless us all.

Posted in economic recovery, fear, investment myths, investment wisdom, market corrections, Market falls, market volatility, retirement investing, saving, stock rallies, Successful living | Leave a comment

Sheer Panic

I wrote a post early in the month.  It was just after the selling that continues had begun. What I confess I thought would be a 5% consolidation of recent gains is approaching 10% and is, many hours when markets are open, full-blown panic.  Panic as in “GET ME OUT!!! NOW.  I’ll take whatever you offer.”

Needless to say, this is an extremely challenging environment. The speed, depth, and duration of the daily losses, paired with the volatility spikes, are things we haven’t seen since 2008.

The average stock in the S&P 500 is now down over 20% from its recent high, in many cases that is late September. Meanwhile, the S&P 500 Index has dropped 19 of the past 24 days and 13 of the past 15 — again, this is something that hasn’t happened since 2008.

Moreover, the pace of this downward dive has been nothing short of breathtaking. Even overlooking yesterday’s extreme moves (with the S&P 500 down 3.09%; the NASDAQ down 4.43%), last Wednesday & Thursday’s two-session 5.3% decline in the S&P was one of the largest drops seen in the past 50 years. And the RSI (Relative Strength Index) hit 17.6 — note it has only traded below 20 six times in the past 30 years.

That’s what is, my friends.  But why has this happened now? Especially at a time with  record low unemployment and record high GDP?  This is, to me at least, a mystery. Sure, interest rates are rising, but they’ve been rising for years now — slowly, steadily, and with great anticipation and foresight — there haven’t been any “surprise” hikes. Further, interest rates remain, unquestionably, near historically low. Some feel the market’s fall may be related to tariffs or tensions with China, but those realities have been going on for the better part of a year. Others contend that earnings are slowing. Perhaps, but earnings are estimated to grow by more than 10% in 2019, and more than 10% in 2020, meaning the current market multiple stocks carry will easily be “grown into.” I also hear that the market’s forward P/E is too high – predictions on stock valuations next year. But P/E’s are about the lowest they’ve been in the past four years, and already down about 18% from December 2017 highs. Even before this month’s market falls, those valuations were sitting right on their 5-year average

In searching for an explanation for the recent drawdown, still others point to technical factors – risk parity funds, negative flows on passive ETFs, a lack of buybacks, etc. It’s hard to pinpoint what the cause is. The more relevant question is likely: where do we go from here?

With that in mind, but with no sense of the time these things will take to play out, four things remain true, and may offer a glimpse of what’s to come:

1) As we are still toward the beginning of earnings season, we are in the midst of a stock buyback blackout period. Meaningful buybacks will kick-in within days (beginning 48 hours after they report, companies may repurchase up to 25% of the Average Daily Volume) as the bulk of companies report this week. This should help lift stock prices soon.

2) Midterms will be upon us and soon behind us. This tends to be a very favorable time for the markets. In fact, over the past 80 years, according to Deutsche Bank, the three-month period running from a month ahead to two months after the election has produced a median +8% gain. And that includes only one decline, a -4% drop in 1978, over that period in the last 21 midterm years. So, 20 out of 21 being positive is pretty good.

3) Seasonality: Over the past 30 years (results are similar over 20- and 10-years, too), the fourth quarter of the calendar year is by far the best quarter for the S&P 500, producing an average +4.76% gain

4) Dips and Corrections are temporary:

a) The SPX has dropped by -4% or more in one day on 41 occasions over the past 59 years (going back to 1959 — the first full year of data). We’ve seen more than 10 days this year, so far, with drops between -2.1% and -4.1%.
b) Over the next month, the S&P was relatively flat (up an average of about one-half of a percent), but over the next year the index was up an average of +20.1%. Breaking down the latter figure, the S&P was up 78% of the time over the next year, including up by double digits 75% of the time with a range of +12% to +67%.
c) Finally, there have been 15 drawdowns of -5% or more since the end of the financial crisis. Every single drawdown (15 out of 15) has seen a recovery. In other words, every single dip should have been bought. Despite these persistent drawdowns, the market moved higher by +412%, in just over 8 years:

Over the past 30 years, alone, the S&P 500 Total Return Index is up +1,731% — recessions, corrections, and drawdowns included.  Every dip has been bought. And without knowing exactly when the drawdown will begin or end, there has never been a reliably good time to be out of the market. It has paid to stay invested.

Is what’s happening upsetting? You betcha.  But it will pass. Patience, dear people. Patience.  If one hopes to get the benefits of investing in stocks, you must be able to take the occasional drawdowns.  It’s like growing roses: you must endure being stuck by thorns.

I am in Romania right now, speaking at several locations.  Many of the statistics I have sited in this post have charts accompanying them. Unfortunately, your trusted blog writer is incapable of figuring out how to post the charts, so you’ll have to do without them.

This too shall pass.  God bless us all.

Posted in economic recovery, fear, investment myths, investment wisdom, market corrections, Market falls, market volatility, Personal Finance, retirement investing, saving, stock rallies, Successful living | Leave a comment

Well, Well, Well, What Do We Have Here?

Investment markets had a bad day today.  They did come back a bit into the close, but still it was ugly.

Why?  And should we be worried?

First, some thoughts on why.

As you regular readers of my irregular blog know, I tend to comment more at times of market turmoil than I do when all is going seemingly well.  Having come through the historically worst month of the market’s year – September – relatively unscathed this year, October is not starting out so well.  Usually, with occasional, noteworthy exceptions, October is a better month for investors. And the six months that follow – November through April – are, historically, the better half of the year by far.  So what’s up this year?

Don’t know. But I doubt it’s much.  I suspect it is a reaction to higher interest rates because the economy is doing so well.  (You might want to read that last sentence again.) Yes, markets can have hissy-fits over economic news that is too good. Why? Because the Fed will keep raising interest rates and also become more attentive to inflation.

Yet, this is all part of a healthy, growing economy. And be assured, we are not yet at “interest-rate neutral.” Our short-term interest rates fell to zero, remember, for many years after 2008.  As our economy has convalesced, gotten out of bed, started to walk again, and now is beginning to jog, what I see is very normal.

Next week starts earnings season. It promises to be very good. It will show that the economy is starting to run now that it has two quarters of lower tax rates, less regulation, and higher consumer and investor confidence under its belt.

Please don’t lose heart or be scared out of the market. That’s why I’m writing now.

If we look back on historic market data over the last 70 years, we have had 5% drops in the stock market about three times every years, 10% drops about once a year, 15% drops about once every three years, and 20% or greater drops every six years or so. That’s the data. Trust me, it does not make sense to try to foresee and exit the market to avoid 5% or 10 % drops, if that’s what we’re in the midst of. On the other hand, if we’re facing a large drop of 20% or more – and I doubt that very much, given economic realities on the ground – there are warning signs that might help us see if a train is about to run us over.

The predictor I trust the most is The Conference Board’s Leading Economic Indicators (“LEI”) and its Coincident Economic Indicators (“CEI”), and they’re not telling us anything bad is yet on its way.  (Of course, if we were about to be invaded by martians, the data would not pick that up.) Here’s the most recent LEI and CEI data, from August:








Look carefully at this August graph.  Vertical grey lines are recessions. Note what happens to the LEI and CEI lines as a recession is approaching: both lines begin to fall, months or even a year or more before a recession starts. Do you see the lines declining in 2018?  No, both are still rising.  Will they keep rising? Of course not.  But the data is not telling me that today’s, or this week’s, falling markets are likely signaling the start of something very bad or long term.  And yes, I realize the LEI and CEI data cover only activity through August, 2018, now more than a month ago.  But don’t miss it: a downtrend in or a peaking of economic activity had not, for sure, started by late August.

So, for now, at least, don’t lose heart.  Stay invested.  Trust. And have patience.

God bless you.

Posted in economic recovery, fear, investment myths, investment wisdom, market corrections, Market falls, market volatility, Personal Finance, retirement investing, saving, stock rallies, Successful living, Uncategorized | Leave a comment

Timely Advice

Words for my retirement investment friends to ponder this week.


Undervalued Financial Advice

There’s a lot of overvalued financial advice out there these days.Don’t drink lattes or you’ll never be able to save for retirement.

You should make your own toothpaste to save more money.

Just follow my simple system to get the highest interest rate on your savings account.

There’s nothing wrong with cutting back, being frugal with your money, or maximizing interest earned on your savings. But these are all tactics that will, at best, offer small financial payoffs. Most people will see larger gains focusing on the big picture.

With the big picture in mind, here are four pieces of undervalued financial advice:

1. Avoid the allure of more. On this week’s Armchair Expert, Ted Danson told Dax Shepard about his relationship with money following his huge payday from the success of Cheers (which remains a top 5 sitcom of all-time):

You start getting chunks of money you’ve never gotten before. And you were quite happy without it  — I was. I was quite content with whatever and then lots of money came my way and I was like, “Oh I don’t want to lose this and I wonder if I could get more.”

Most of us will never have Sam Malone money but it’s a good lesson that no matter how much money you make there will always be the temptation to want more of it. This can be an unhealthy obsession when it leads to out of control lifestyle inflation.

2. Envy is more expensive than gratitude. A recent survey asked people from around the globe, “All things considered, do you think the world is getting better or worse, or neither getting better nor worse?”. Just 6% of U.S. respondents and 4% of Germans thought things are getting better.

Oxford’s Max Roser published a piece in response to these results that show no generation has ever had higher living standards — education, health, literacy, freedom, education, etc. — than we do today.

Nonfiction released a report this week called The Secret Financial Lives of Americans. More than half of their respondents admit to having cried because they didn’t have enough money. This might make sense for the poor and lower middle class but that number was 41% for people who earn $200,000 or more.

Maybe the entire 41% live in Silicon Valley or New York City but I’m guessing this has more to do with our financial envy of the dreaded Jones down the block than anything. Envy has a stronger hold on our relationship with money than most people realize and these feelings often trump our ability to be grateful for what we already have.

We don’t compare ourselves to our ancestors, we compare ourselves to our neighbors1

3. Time and health matter more than wealth. Cornelius Vanderbilt’s son William was far and away the richest person in the world after doubling the inheritance given to him by his late father in just 6 years. But the burden of wealth brought him nothing but anxiety. He spent all of his time managing his substantial wealth through the family’s businesses, which meant he had no time to enjoy his money or take care of his body.

He once said of a neighbor who didn’t have as much money, “He isn’t worth a hundredth part as much as I am, but he has more of the real pleasures of life than I have. His house is as comfortable as mine, even if it didn’t cost so much; his team is about as good as mine; his opera box is next to mine; his health is better than mine, and he will probably outlive me. And he can trust his friends.”

William also told his nephew, “What’s the use, Sam, of having all this money if you cannot enjoy it? My wealth is no comfort to me if I have not good health behind it.”

All the money in the world doesn’t matter if you don’t have the time or the health to enjoy it.

4. Stay married. It makes sense intuitively, but research shows people who get married and stay married tend to build more wealth than people who don’t get married or end up divorced.

A study by National Bureau of Economic Research found the median married household of retirement age had 10 times the savings as the typical single household. Based on his work from studying thousands of millionaires, Thomas Stanley, author of The Millionaire Next Door, found that millionaire couples have less than one-third the divorce rate of non-millionaire couples.

And researchers from Ohio University found that people who get divorced experience an average drop in wealth of 77%. They found wealth started to decline four years before a divorce so staying in a toxic marriage to avoid financial ruin is probably not sustainable either because you stop planning ahead for the future.

No one goes into a marriage with the assumption it’s not going to work out. But there is something to be said for your levels of happiness, stress, and wealth by finding a financially compatible spouse.

Further Reading:
The 3 Levels of Wealth

1Or even worse — celebrities and social media personalities.


My Amazon Picks
Posted in fear, investment myths, investment wisdom, market volatility, news biases, Personal Finance, retirement investing, Successful living | Leave a comment

Now Here’s Some Serious, Monday Morning Research

Check this chart out.

I love it, especially look at the line at its bottom, disclaiming its seriousness.  But cable and online news sources feed investors this kind of coincidental factoid without such honest disclaimers. The news outlets know this is attractive click bait, as they endlessly search out more business and online shares.  People fall for it.

Be careful!

Posted in fear, investment myths, investment wisdom, Market falls, market volatility, retirement investing, stock rallies, Successful living | 1 Comment