February 2018 Market Recap: Stocks Bounce Back after Volatility Rocks Markets

Risks are building in the markets but so is bearishness. Though markets are going to do what they are going to do in short-term, we have learned there are still not a lot of natural sellers, and if the market gets too offside, you can bet the other side for a trade.The fast money is now so short-term focused, especially the growing number of HFTs that don’t hold overnight risk, they have no patience and must cover quickly especially if the market begins to move against them. I do believe investors are going to get a chance to buy stocks and much lower levels, however.

The stock market went stock market in February. After closing January at 2,823.81, the S&P 500 ended February down 3.89% at 2,713.83. Prior to the normal and much-needed correction, the S&P 500 was at its most expensive level in 14 years. While stock valuations remain an issue, I believe these high valuations are justified if corporate earnings continue to rise, the economy remains strong, no imbalances or surprises emerge, and interest rates stay relatively low. I talked about this last month in avoiding naïve extrapolation. With February finishing the month down, the U.S. stock market experienced its first monthly drop in fifteen months. So, RIP to the positive feedback loop that markets are a one-way trade to easy money because of ______. Add the weak hands that jumped in late and panicked at the first sight of red in their portfolio and the environment was ripe for a selloff.

The closest analogy I have is akin to dating in Los Angeles. Person A (apparently harmless Stock Market) spends the first 8-12 months pretending to be someone else in a full Daniel Day-Lewis effort to convince Person B (the suddenly risk friendly investor), who is also pretending to be someone else, that they are the perfect match and strangely have everything in common, “What!? You also think Tyler Perry’s Boo 2! A Madea Halloween is the greatest movie of all-time?” Things are going well. Both parties are sticking to their false narrative with only minor slippage. The relationship gets too comfortable, reality creeps in as the false personages sheds, and finally someone throws their soup at the waiter and claims 9/11 was an inside job.

The point is. There is volatility in all aspects of life. With work, with your children, with your partner, with your business and dreams, and definitely with your investments. Accept it and expect it. Don’t let the confidence nor doomsayers’ rhetoric change a sound strategy. Wallstreet needs Mainstreet to buy their products and churn their accounts. Financial media needs ad revenues via clicks or viewers so they can never run segment that is, “Hey folks, markets are acting normal, the best action is to do nothing and focus on the personal finance at-risk items you can control. Check back in this summer for a quick update.”

If you’re truly worried and notice how the anxiety/angst has made you a Debbie Downer, then it’s time to re-evaluate your portfolio and assess your bear market strategy. This is important. There needs to be a tangible game plan that you refer to when things get rough and they will at some point. I know some investors have jettison components of their asset allocation due to recency bias and the lack of performance relative to U.S. Growth stocks. That herd mentality becomes dangerous as investors reduce the amount and degree of hedging and risk management components in their portfolio. When everyone rushes to the exit at the same time prices collapse and it takes a while for the market to catch a bid.

Investors who used the cheaper online advisory platforms have learned the hard way during the 1,000-point Dow sell off on February 5th when they were unable to login to place trades. Those that use robo-advisory services – from the likes of Vanguard and Charles Schwab to pure players Betterment and Wealthfront – suffered from spotty access and being shut out of their trading platforms altogether.

I’m a big fan of the “Rocky” movies. Duke, played by Tony Burton, is famous for playing both Apollo Creed’s and Rocky’s corner man in the “Rocky” movies. In Rocky IV, Rocky heads to Russia to avenge the death of Apollo Creed and fight Ivan Drago. Sadly, Tony Burton passed away two years ago, but what I remember most from him in the films is the overly simplistic & succinct advice he would yell at Rocky between rounds after he just took 2,453 unanswered blows to the face. I would love to create a mobile app that is just a pop up of Duke’s intense face followed by random quotes from Rocky IV anytime an investor without a plan tries to panic sell. So the next time the President starts a trade war or the market opens down 2% for no reason and your portfolio takes a shot to the face…This pops up followed by one of these lines:

“Be a rock for me!”
“Be strong! No Pain!”
“Brace Yourself. It’s All-right”
“You’re doing fine. You’re doing great.”
“Don’t go down. Don’t go down.”

At this point, I expect volatility to continue in both the equities and fixed income markets as the Federal Reserve, European Central Bank, and other central banks pursue a tightening monetary policy. New Fed chairman, Jerome Powell, declined to raise the Federal Funds target rate at its February meeting, but the board has indicated that at least three – and possibly four – small rate hikes could be in store for 2018. The Fed is expected to raise rates by 0.25% in March. Historically, it is not the raising of rates by the Fed that has been the downfall of stocks but rather the rate of increases and after they have finished raising rates.

In addition to a gradual rate increase, the Fed began a long-term effort to trim its $4.5 trillion balance sheet in October 2017 by ending its policy of purchasing Treasury issues and mortgage-backed securities. With liquidity marginally diminishing, interest rates could rise, affecting stock and bond prices. These mandates will be tough with the federal budget deficit on track to blow through $1 trillion in 2019, along with a weak U.S. dollar, and threats of trade wars.

Know what you own. The cost, the risk, & the bear market strategy. When you wake up to the S&P 500 down 2-3% remember the words of the late Tony Burton, “Be a rock for me. Be strong. No Pain.”

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