Friday, June 21, 2013

Put Things in Perspective

Last month I wrote:  “When it seems too good to be true”.   In that article I explained the reason why I was skeptical of the market’s rise this year, and warned that May 22 and June 20 (options expiration dates) would likely be days with extreme volatility and probable market declines.  May 21 seems to be the peak this year so far (S&P500 at 1669 on 5/21) and June 20 had a very large (2.5%) one day decline (S&P500 at 1588).

The most bewildering part of May-June for many is the fact that fixed income investments declined significantly.  7-10 year US Treasuries actually declined in value by almost 6%.  Those that thought Gold, Silver and Bonds were “safe” have learned otherwise. (Gold is now down more than 30% from it’s peak.)

It should now be apparent why I have been recommending to investors that they overweight their cash holdings. Sometimes there are times when everything except short term money market/cash holdings decline in value. (And, when inflation if considered, there are times when everything, including cash declines in value.)

While all of this up/down can make the average investor a bit nervous, and listening to the financial TV talking heads creates anxiety; It is always important to put things in perspective and realize that this type of market action is really “normal” and beneficial for investors with a long term focus. Even after the 6/20 decline, global stocks are still up more than 15% YOY.

Stock prices rose too high, too fast and interest rates fell too low—Stocks AND Bonds have been overdue for a correction. Couple this with markets finally realizing that the Fed never intended for stimulus to last forever and you get what you’ve seen the last couple of months.

Is this volatility over?  Maybe, but Probably Not.   The S&P500 is only down 5%--normally corrections are bigger.  But, some segments are down more: World Stocks down almost 8%, Utility Stocks down close to 10%.

While the global economy seems to be in a long term slow recovery, short term uncertainty still looms large.  Earning season begins again on July 9 with Alcoa and continues throughout July.  Reported earnings and forward looking “guidance” more than anything else will affect markets.  It always pays to be cautious—so a conservative stance and a modified dollar cost averaging strategy when deploying cash always makes sense in uncertain times.

I am still long term bullish and short term cautious. I think earnings and guidance may disappoint in July and that may turn out to be a very attractive buying opportunity.
This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk.  Most investing involves costs. A complete analysis of these costs should be undertaken before making any choice. Costs, risks and expected results should all be weighed in the balance.