Wall Street — Where Good News Can Be Seen as Bad
We didn’t have a real great market this past week. Matter of fact, according to the folks at CNBC, this was “the worst weekly performance by the Dow this year.” Though I agree with Mr. Bob Doll, the chief equity strategist at Nuveen Asset Management, when he said the market is in a pause mode and it will probably stay that way for a while, (1), I want to explain why I chose the headline I have.
A little context, please
Do you remember all the way back to the start of this month when we established new, all-time highs in both the S&P and Dow? In the interim, we’ve managed to drop about 3% in both, with the attendant “look out below” commentary building up daily. I have no idea as to how much lower we’ll be going on this adjustment but headlines like these certainly imply that the end-times are close upon us again. Not so fast…
Please understand that the daily warp and weave of the markets is driven by traders…individuals whose main goal is to create profits from short-term movements, both up and down. They are not investors. A long-term holding is something they still hold at lunchtime. They are driven by the daily headlines and their interpretation of “what does it mean really” in pronouncements from the Fed, etc.
The good headline that spooked the traders
The Commerce Department reported on Thursday that initial unemployment claims had dropped the week before to close to a six-year post-recession low. So, more people working, hiring trend appears positive; all good – right? Not if you’re a trader.
What “the market” decided was that this good news effectively has ensured that the Fed will announce the beginning (operative term) of the tapering of its program to artificially hold down interest rates, i.e., quantitative easing. Tapering—buying fewer bonds each month—is still accommodative policy. It’s just policy that becomes less accommodative. So, if the rates won’t be restrained AND hiring is improving AND other economic indicators (real estate, car sales, etc.) continue to show improvement, it must mean that interest rates will now go up!
And, as if by magic, last Thursday, they did just that. The 10 year US Treasury note, which is the touchstone for many other interest rate products like mortgages, shot up to its highest point in two years. (2) (The fact that they’ve been abnormally low in the meantime is kind of ignored…) In essence, the market is having conniptions, not because the Fed is tightening, but because the Fed is nearing the point at which it will begin to ease less. And, as a trader, you want to be in/out ahead of the actual event.
Back to blocking and tackling
Sorry for the football reference for those who could care less about it. It is a phrase used at all levels to remind the players to work on the fundamentals, as that’s what your success is built upon.
In the context of this letter, I’m referring to the fact that for the past few years, due in large part to the effect of the Fed’s easing – together with the leftovers from the recession, Europe, DC and related challenges – our markets have pretty much moved as one mega-market. There’s been very little difference in how the shares of one company or sector move relative to all the others – a situation known as being highly correlated. All the boats ride the tide, kind of thing.
What’s helping to roil the markets lately is the fact that it seems to me that we’re finally moving away from these singular market movements. We’re going to be basing our choices more on the fundamentals of a particular investment – not the whole thing. Sure, big picture stuff will still have an effect but more so stuff like earnings – a novel idea – the ability to innovate, capture market share and the like.
I think too that you’ll see some of the better money managers be able to better distinguish themselves from the current “all you need is an index” mentality with their ability to find the better performers and benefit from that. As is usually the case with investing, there is no one, for sure, always best way to achieve your goals. Helping you know what those are and how to use them are a couple of the things your advisor does for you.
Summary
According to S&P, since 1971, September has been our worst performing month, being down an average of about 0.5% over that time. While I’m not a follower of the “it’s always been that way” school, with the DCs coming back and lots on their plate that they’ve been deferring, it could make for more volatility.
Don’t let the headlines nor daily market swings affect you. If we do have some sort of correction, use the opportunity to deter\mine what sectors and companies will perform best after the fact and position yourself accordingly.
I’m off to visit Wall Street this week. Hope to have some good insights for you next time.
Cheers!
Mike
509-747-3323
(1) CNBC, 15 August 2013
(2) Reuters, 16 August 2013
To get an overview of economic conditions, use this link. It’s updated monthly.
http://www.russell.com/Helping-Advisors/Markets/EconomicIndicatorsDashboard.aspx
Past performance is not indicative of future returns. Investing in securities of any type involves certain risks, including potential loss of principal. Investment return and principal value in a bond and/or securities portfolio will fluctuate so that investments, when sold or redeemed, may be worth more, or less, than the original investment.
Investing in sectors may involve a greater degree of risk than investments with broader diversification. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.
Michael J. Maehl, CWM®
Senior Vice President
Opus 111 Group LLC
400 S. Jefferson, Suite 400
Spokane. WA 99204-3142
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