Black Swan

One year ago today, I wrote a post titled, Beware the Black Swan in OilA black swan is defined as,  “a surprise, which has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight.”

Oil turned out to be a black swan in 2015.  Looking back it’s easy to rationalize how an oversupply of oil could cause a severe downside in prices. OPEC had already warned that they were going to go after the market share of U.S. energy companies. This black swan has caused capital destruction throughout the entire energy sector.  The final phase of this black swan may result in consolidation or bankruptcies in the sector.

Moreover, the final phase is being marked by the dreaded dividend cuts. In past posts, I recommended that the time to buy the energy companies was when dividends were cut. This may no longer be prudent advice. This week, Kinder Morgan, which is one of the biggest MLP’s, cut its dividend. If oil remains near today’s price of $36 a barrel of oil, I expect more drastic dividend cuts throughout the industry.

To make matters worse, energy companies now have limited access to issue bonds to pay dividends. The game of financially engineering dividends through issuing debt is now over. The high yield bond markets are frozen. The lowest quality/junk bonds are now experiencing illiquidity not seen since the credit crisis. The falling value of these bonds could be setting up for a very interesting investment opportunity in 2016.

Throughout 2015, I recommended a zero allocation in energy companies and I still believe for now that it’s best to watch from the sidelines. We have experienced three market crashes in the last 15 years – in 2001 it was technology, in 2008 it was the Financial Sector, and now in 2015 it is the Energy’s turn to get crushed.  The Technology and Banking sector both eventually recovered, which is why Energy investors are holding out. I expect energy prices to rebound sharply once supply/demand forces becomes more balanced. However, like all market predictions, it’s the timing that is usually wrong. Investors have been trying all year to call the bottom only to be early. Eventually, they will get the timing right.

The best piece of advice I have for you this holiday season is to avoid reading crystal ball predictions. Last year, Barron’s Magazine, reported that EVERY Wall Street strategist was bullish in 2015. Many analysts predicted 10% gains and a recovery in energy markets.  Legendary investor Jeremy Grantham had the same advice this week, which is to watch out for Wall Street optimists.

My non-market related 2016 prediction is that active portfolio management will have another strong year.  In my opinion, the growth of Exchange-Traded Funds (ETFs) has increased market instability and is creating many more investment opportunities for active managers. ETF’s should continue to gain in popularity along with robo-style investing. Robo-investing is low cost investing, but you get what you pay for. I believe these services just blindly buy ETF’s without regard to valuations. They construct asset allocations strictly using  ETFs and take a blanket approach of buying major indices globally. This spreads the risk because they are global or so they say. In my opinion, nothing could be further from the truth. Investment risk to me, is a company’s ability to reinvest cash flows back to the company or return capital to shareholders. If there is no cash flow, it’s a risky investment. In contrast, if there is a strong growing cash flow, recurring revenue stream, expanding market opportunities, or above average dividends, it’s a lower risk investment. I believe that 2016 should be another good year for active managers.

If you would like to speak with me about building a diversified portfolio through customized portfolio management that aligns your risk tolerance with your financial goals, feel free to send an email to mitch@cgfadvisor.com.

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Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

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Sleeping Well

Is the CEO of the stock you own sleeping well?

As you evaluate an investment, you have to analyze that company’s prospects from multiple angles. The part that often gets missed when analyzing an investment is what can go wrong. Behavior finance is a new field that seeks to explain why people make irrational financial decisions. Confirmation bias, which is a behavior bias, might explain part of the reason why many investors have suffered poor returns in 2015.

Confirmation bias is the tendency to search for or interpret information in a way that confirms one’s own beliefs. The investment trap that many investors fall into is that they only read the supporting evidence to buy or hold an investment. Filtering out the negative information and only focusing on the positives leads to overconfidence.
This overconfidence leads to taking even further risk. The sign of an overconfident investor is a portfolio with fewer holdings and one that is much less diversified. The worst case is when the portfolio has a low return, but holds investments that have already risen in value. Chasing past returns is a sign of an overconfident investor. Another sign of overconfidence is overweighting your entire portfolio into international markets or individual sectors.

In my experience, the best investors always worry about what can potentially go wrong. They are aware of changing industry dynamics, new government legislation, and seek new information that could alter their investment thesis.

The large institutions and mutual fund companies that have access to speak with CEO’s are after new information that does not support their investment thesis. They want to learn what keeps the CEO up at night. The worst investments of 2015 seem to have been those in companies that lack innovation and have been unable to respond to rapidly changing industry dynamics. In my opinion, the worst investments tend to be highly correlated to the CEO’s who have trouble sleeping.

The CEO’s that have had the most to worry about in 2015 are those leading energy companies. After an energy stock CEO falls asleep, they are having nightmares about OPEC. OPEC is at war with itself. Oil prices fell below $40 a barrel this week, and there is no end in sight. I believe that energy investors have suffered from overconfidence. Their downfall is focusing on dividends and fundamentals rather than politics and oversupply.

In my July 2015 client letter, I provided my view on the sectors that I favored in my client’s portfolio. Those views have not changed. At that time, I wrote that in such a low growth, low interest rate, investors would be willing to pay a premium to own innovation companies that are growing revenues faster than the economy. The CEO’s that are sleeping well are worried that their growth rates may fall from 25% to 20% next year. The market is clearly rewarding the companies that are growing top line revenue growth with only the prospect of growing future earnings.

In the last quarter, this trend has accelerated and I believe that it will continue into 2016. The best way that I try to avoid confirmation bias is to focus more on the potential downside of an investment rather than only the upside. This trick may help you to avoid falling into the investment trap that caught many investors in 2015.
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Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities. All performance is based on data gathered from Morningstar.com.

The material on this site represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed to be accurate, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions. It should not be construed as advice meeting the particular investment needs of any investor.

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High Anxiety Levels

A few weeks ago, I wrote an article on changing consumer behaviors and the impact it was having on retailers. This week, the market woke up to this reality. Many popular retailers such as Macy’s, Nordstrom, and JCPenney lost over 15% of their market value. One thing is for certain, expect huge sales this year as inventory levels are high and management teams have discounted earnings. The CEO of Macy’s said it himself, “We’re going to take markdowns,” he said. “Consumers are going to have a field day”.

The warm weather is partly to blame for retail sales but changing consumer behavior seems to be the real culprit. The millennial generation is not shopping at the mall. They are on their iPhones and placing orders through their Amazon Prime accounts or shopping at discount outlets. Another area of the market that is causing high anxiety levels for investors is the Energy sector.

This week, oil surplus levels hit the highest level in a decade.The warm weather could also be to blame but the real reason is Saudi Arabia’s new oil policy is working to reclaim market share from U.S. energy producers. The price for a barrel of oil is now near $40 after falling nearly 9% this week. Oil prices may have trouble rising until either U.S. oil production slows or Saudi Arabia changes its energy policy.

The deflationary spiral continues and there is no end in sight to the drop in prices. Back in early December 2014 and July 2015, I warned that the Energy sector was setting up to be a classic “value trap”. I continue to believe the entire commodity sector remains a “value trap”. We could be in store for a number of bankruptcies and mass layoffs in this sector. The market correction in Emerging Markets has investors on high alert. My fear is that if oil falls too low we will begin to see civil unrest in many countries whose economies rely on high energy prices.

Investors are also very concerned that Europe’s central bank will be easing monetary policy, while at the same, the U.S. Federal Reserve Bank will be tightening policy. Many Federal Reserve bankers indicated this week that they planned on raising rates for the first time in a decade when they meet on December 15 and 16. This decision is having a big impact on the dollar/euro currency exchange rate and many multinational corporations.

The deplorable terrorist attack in France will also increase anxiety levels. The boldness of the recent bomb on the Russian passenger jet and France attack will create economic and political uncertainty. We may all share different political beliefs but all of my clients agree that the risks are higher and people do not feel safe. My recommendation is to keep a higher cash balance or keep a portion of your portfolio in very liquid investments.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

The material in this blog represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed to be accurate, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions. It should not be construed as advice meeting the particular investment needs of any investor.

Underlying data source from Morningstar.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

Rising Rates

On Friday, the Labor Department reported that nonfarm payrolls increased 271,000 in October. The strong labor market makes it more likely that the Federal Reserve will raise the federal funds rate from 0 to .25 percent. If the Fed raises rates in December, the market will then begin to focus on the next rate hike.

As seen by Friday’s market action, investing in low risk investments is now very difficult. If rates begin to slowly rise, we could see many once conservative asset classes become less liquid and fall in value. For example, the Utilities Select Sector SPDR ETF (XLU), lost 3.5% Friday. This amounts to an entire year’s worth of dividends! There were many other stocks with above average dividends that fell as the result of the market pricing a Fed move in December. The biggest impact could be seen in the currency markets. The dollar strengthened, which negatively impacted Emerging Markets, Gold, and many other overseas markets.

There are many hidden investment risks for conservative investors. I continue to believe that many oil stocks are overvalued if energy prices do not rise. Health Care stocks are vulnerable if Hillary Clinton and Congress continue to target the pricing policies of drug companies. Bond investing could be a losing proposition if rates rise over time. Corporate and municipal bonds with long-term maturities may not be good investments. For instance, as of last Friday’s close, the Vanguard Long-Term Bond Index Fund is now down -3.91% YTD.

Going forward, it will be interesting to see how markets react to European Central bank’s easing monetary policy, while at the same time, the U.S. Federal Reserve is tightening its policy. The asset allocating challenge is whether to invest in conservative investments with high dividends or faster growing companies that have more volatility.

I believe it is not prudent to invest in a conservative investment just for the sake of its historical low risk profile. It is more appropriate to buy the more undervalued investment through fundamental analysis. By customizing my clients’ portfolios, I have been actively managing investment risks. With a focus on protecting and preserving clients wealth, I will continue to take risks only when I believe a business is fundamentally undervalued.

 

Please read our disclosure statement regarding the contents of this post and our website as a whole.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock’s weight in the index proportionate to its market value.

The material in this blog represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed to be accurate, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions. It should not be construed as advice meeting the particular investment needs of any investor.

Underlying data source from Morningstar.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

Black Magic

According to FactSet, during the month of October, actual earnings for companies in the S&P 500 fell by -3.8% in the Q3. However, in terms of price, the value of the S&P 500 rose by 8.8% in October. This could only mean one thing. The P/E ratio for the entire market had to rise. Below is the forward 12-month P/E ratio for the S&P 500. Before the sell-off in the summer, the 12-month forward P/E was over 17 and once again it is nearing this level.

Today on Halloween, I believe a little black magic is being performed. This is how the game is played. (Please note that this is only an example, and I am not making a buy or sell recommendation on Exxon.)

Yesterday, Exxon beat 3Q earnings by almost 10% and the stock immediately rose following the earnings release. Expectations were for $0.89 cents per share in Q3 and the actual earnings came in at $1.01 per share. A blowout quarter and shareholders should be happy. Or should they?

If you checked the earnings expectations 90 days ago, they were around $1.04 cents per share. At that time on July 31, the stock was trading around $79. Yesterday, the stock was trading at $81 and subsequently jumped to $83.50 following the release of earnings. With a little black magic, the lowered earnings estimate was a low bar for Exxon’s management to beat earnings. The market cheered, the headline beat, but in reality the earnings are under pressure.

The 5-year average P/E ratio is 11.50. As an analyst, the number that I believe is most important, is the forward P/E ratio. This ratio is what the P/E will be 12 months from now if the company meets current earnings estimates and the price of the stock does not change. For Exxon, this forward P/E will be 20, which is way above its historical average. The stock could be almost 40% more expensive than its historical average if the energy market does not rebound.

Again, this is not a case to bet against Exxon, but more of an example that I saw being played out this earnings season. Many contrarian investors will buy Exxon for the very reason that earnings are low. This type of investor has success when earnings rebound. There is also a positive case for holding Exxon in that the strongest energy companies will benefit in this low cost energy environment as smaller companies struggle to stay in business. Exxon stands to pick up market share. However, this also could be the perfect value trap.

The point is that the market rally of 8.8% in October was not due to higher earnings. Much like Exxon, many companies beat lowered earnings expectations. The result is that valuations have risen, which have made stocks more expensive to own. The earnings bar is now being lowered more for next quarter. At some point, investors might come to their senses and realize that black magic has crept up inside of their portfolios.

Happy Halloween!

 

Please read our disclosure statement regarding the contents of this post and our website as a whole.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock’s weight in the index proportionate to its market value.

The material in this blog represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed to be accurate, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions. It should not be construed as advice meeting the particular investment needs of any investor.

Underlying data source from Morningstar.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

Risk Management

Protecting your portfolio against possible losses is just as important as pursuing gains. Risk management is an integral part of my investing process. I continuously assess risks at the security, portfolio, and market level. I analyze risks from many different angles and I do my best to choose only the risks that I believe have the highest potential for return. As many investors have learned in 2015, volatility can damage returns if you do not manage risk properly. This year I have managed portfolios with a focus on protecting downside risk. While it’s impossible to anticipate market surprises, you can actively manage a portfolio to lower the negative draw-downs of a portfolio.

So how do I manage investment risks?

I manage risks through fundamental analysis. I analyze individual companies accounting statements and monitor for changes in market sentiment. Analyzing sentiment is more of an art and analyzing accounting statements is a science. The best way to describe this part of my risk management process is through the chart below that compares the S&P 500 earnings vs. S&P 500 index returns:

pict2

The red line represents corporate earnings and the black line represents stock prices. As you can see, the two lines are very highly correlated. The only time that this correlation broke down was during the technology bubble in the late 1990’s. Valuations were clearly out of line with earnings and investor sentiment was speculative. My risk management process would have been flashing red.

In the upper right hand corner of this chart, you can see that earnings once again started to outpace stock prices at the end of last year. This is partly the reason why cash balances have been high in my clients’ portfolios. This same trend of higher valuations could be seen when analyzing the fundamentals of many individual stocks.

Earnings are now more in-line with stock prices. However, expectations are still high given that the 2016 consensus forecast of economists surveyed by Thomson Reuters I/B/E/S is $130.49 in earnings. I believe that expectations may still need to be lowered because of a slowing global economy. While we may not be in a stock market bubble, earnings will need to grow to keep pace with expectations. In short, I expect more market volatility in both directions, as investor sentiment goes from one extreme to the next because future growth rates are now much more dependent on global growth.

 

 

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock’s weight in the index proportionate to its market value.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

The material on this site represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed to be accurate, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions. It should not be construed as advice meeting the particular investment needs of any investor.
Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

Time is money

The growth of High Frequency Trading (HFT) has been astonishing. High frequency trading involves frequent turnover of securities in milliseconds. HFT relies on algorithms to spot and profit from mispricing of securities between exchanges. These computers are also programmed to trade on new information instantaneously. Millions of trades are executed per second and react even faster than a blink of an eye. It’s free money to those who have the fastest network. If you are interested in learning more about high-frequency trading, I recommend the book Flash Boys: A Wall Street Revolt written by Michael Lewis.

In my opinion, technology is currently way ahead of legislation. This week U.S. Democratic presidential candidate Hillary Clinton proposed a tax on high-frequency trading. The tax would target securities transactions with excessive levels of order cancellations. A campaign aide said, “The growth of high-frequency trading has unnecessarily burdened our markets and enabled unfair and abusive trading strategies.”

In 2005, HFT accounted for 21% of trading volume and today the percentage is well over 50%. I’ve read estimates that it could be closer to 75% of all market trading volume. There is much debate on whether our markets are now broken. One thing is for certain and that is the speed of technology is impacting markets in ways that we do not fully understand. For long-term investors, HFT matters less. The growth of the market is highly correlated with the growth of earnings. These investors will benefit from earnings growth. For retirees and other investors with shorter time-frames, HFT matters much more. We have recently learned that in times of extreme stress, we should expect liquidity to disappear when you need it the most.

The year-to-date results for the S&P 500 is down 2.14% and the Dow Jones Industrial Average (DJIA) is down 4.14%. The NASDAQ is up almost 2%. The DJIA, which fell around 15% from the high, has since recovered around 8% of the loss. The volatility gauge for the S&P 500 has collapsed over 50%. For the moment, liquidity has returned to the markets. Many believe the rally could continue to the end of the year.

I hope they are correct but I am now managing volatility and investment risks with the expectation that volatility will once again return to the markets. It is impossible to anticipate the short-term whims of the markets but there are trading strategies that you can take to reduce the risk of your portfolio just in case HFT once again causes another flash crash.

 

 

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock’s weight in the index proportionate to its market value.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

The material on this site represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed to be accurate, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions. It should not be construed as advice meeting the particular investment needs of any investor.

Investment data is from Morningstar

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

 

Broken Trust

Financial markets can only operate on trust. Without trust, markets become more volatile, and this uncertainty fuels investors’ fears. On 7/11/15, I wrote that I had no trust in global markets and that overseas investing should come with a warning label, “Investing in global markets and commodities can be hazardous to your portfolio.” At that time, I failed to recognize that I should have mentioned U.S. markets as well.

All financial markets are not functioning normally. Currency markets, bond markets, option markets, energy markets, and the stock market are now under the siege of fear. The media is pointing the finger at the Federal Reserve for a variety of reasons, but the real reason is a loss of investor trust in overseas markets.

It is unsettling investors that overseas markets are having such an influence on US markets. Markets every few years go through bouts of lost trust such as Enron in 2001, illiquid bank balance sheets in 2008, and the Flash Crash in 2010 to name a few recent events. I believe that when we look back on 2015, it will be clear that Emerging Markets was the culprit to the volatility we are currently experiencing. Many Emerging Markets economies rely upon high commodity prices to sustain their economies. Their slowdown stems from the glut of oil caused by the slowdown in China and overproduction of gas in the U.S..

With an unpredictable stock market, high volatility, and no trust in the markets, how are you supposed to invest your money? For obvious reasons, I would place my trust in a professional investor who offered objective investment advice.

As markets have become more volatile, my investment strategy has shifted. I believe for the first time in a long time, fundamentals matter. We are in a period that I prefer active investing over passive. The dysfunctional market is revealing many good individual bargains. The strategy is to buy these names and continue to buy them even more if they go down in value. My first step was maintaining an above average cash allocation in order to have the liquidity to buy these names on the dip. My belief is the blind selling of ETFs is giving the long-term investor a chance to buy into many individual, undervalued securities. ETFs selling is creating forced selling across entire sectors, which pushes the prices down of many high quality companies. The key is that you need to determine the companies that you will be willing to hold over the next 3-5 years and have the confidence to add to them. This is how long-term wealth is created.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

The Fed and Volatility

This week the Federal Reserve voted to not raise interest rates. For those of you who are not familiar with the Federal Open Market Committee (FOMC), this monetary policymaking body meets every six weeks to review economic and financial markets. Earlier this year, the Fed signaled that it intended to hike rates for the first time in nine years. They are now having second thoughts due to the recent global slowdown and the higher volatility that has plagued markets over the last few months.

This week the DJIA went up around 500 points and fell around 500 points. All in all, the weekly change only amounted to -0.30%. The Federal Reserve zero rate interest policy is part of the reason why markets have become so volatile. The other driver of the volatility is that many companies with higher global exposure will see lower growth in their earnings next quarter. FACTSET has reported that companies (ex-Energy) that generate less than 50% of sales inside the U.S., project that earnings may decline -4.9%. Now if you include the earnings of energy companies, the decline is -12.1%. To fight their slowing economies, central banks around the world have been lowering rates and depreciating their currencies. Their goal is to artificially stimulate growth by increasing the money supply in their countries. I anticipate that the volatility in the US markets will continue until those overseas economies see a pickup in growth. We will also have to see whether or not China can recover from their market correction.

Another reason that I believe to be the cause of the volatility/fear is that the Federal Reserve zero rate policy has forced older or more conservative savers into taking risks that they don’t understand. It was not uncommon to find 1-year CD rate over 3% back in 2008. Today, a 1-year CD rate is around 1%. If you are retired and need income, you understand this dilemma. Take more risk to generate income or continue to watch the power of inflation erode your purchasing power. The bull market over the last 6 years and low volatility during this time masked many of the real risks of investing. Savers with low risk tolerances have seen their confidence shaken in this correction. Now that big losses have occurred, I expect the volatility to continue as many investors and large institutions decide how to reallocate their portfolios

As my clients have seen firsthand, I have not sit still watching these events unfold. I am actively monitoring risk and adjusting portfolios to manage volatility. While it’s impossible to predict the mindset of others who might continue to sell in fear, I believe you have to be ready to buy if you recognize the risks and understand the valuations.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 actively traded “blue chip” stocks, primarily industrials, but includes financials and other service-oriented companies. The components, which change from time to time, represent between 15% and 20% of the market value of NYSE stocks.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

Hoping for Rosier Headlines

Another $19 billion was pulled from equity funds in the last week, and that increases the total to $46 billion over the past four weeks. The CBOE Volatility Index shows that speculators have built record positions betting that markets would fall even further. Sentiment is now negative.

It is clear that the global economic outlook is bad and investors have sold in a panic. There is no positive momentum in the market and the herd is decisively scared. The market volatility and negative headlines have reached an extreme. We have experienced a 1,000+ point drop on the Dow Jones Industrial Average and learned that many exchange-traded funds (ETFs) can become mispriced and illiquid when it matters the most.

At the end of last year, I wrote an article on Not Planning to Retire Soon – Hope for Less Rosier Headlines. At that time, investors were cheering all of the rosy headlines and I thought there were not too many bargains in equity markets. Investor confidence was at near all time highs and EVERY Wall Street strategist was bullish in 2015. My feeling was that if the Federal Reserve began to raise interest rates in 2015, equity markets would become more volatile. I recommended that it was best to maintain a cash allocation for clients nearing retirement, as equity valuations remained slightly elevated.

Now that prices have collapsed, it has become a lot less welcoming to buy given all the bad headlines. As I wrote back in December, if you are contributing to your 401(k) or other retirement vehicle, you should be hoping for less rosier headlines. Well, now you have that time.

I believe that the consensus has become too bearish. I’ve suddenly become a contrarian. A contrarian investor by definition does the opposite of the crowd. Negative sentiment will allow you to deploy funds at more advantageously low prices. I continue to believe that now is the time for active management. The gain in popularity of ETFs in favor of active management is creating many interesting opportunities. The consensus view is that ETFs can offer better investment results and improve downside risks. My belief is that ETF investing has created even more of a herd mentality and is exacerbating volatility. While many active portfolio managers have trouble beating the index every year, many do a very good job of managing risk and a few managers have shined by significantly outperforming in this market sell-off. You should either be investing or moving your money to these active managers.

I believe that this is a great time to pull out the scorecard and judge your active manager or wealth advisor. Anyone can make money in a bull market. It will now be easy to see how well they have done in this market correction. You should always use a benchmark to measure whether or not your wealth manager is helping or hurting you from reaching your retirement goals. I can help you take this next step. Feel free to contact me at mitch@cgfadvisor.com if you would like a free evaluation of your portfolio.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 actively traded “blue chip” stocks, primarily industrials, but includes financials and other service-oriented companies. The components, which change from time to time, represent between 15% and 20% of the market value of NYSE stocks.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.