The Market is from Missouri

In February I wrote that markets can go up a lot after the inauguration of a new US President, in the midst of a recession. In May I wrote that Hope and Worry would engage in a classic conflict resulting in market volatility with a possible “correction” after hitting a peak. From the March 9 “bottom” the S&P500 rose 40% until falling 7% in June, and rising back 7% to 940 on July 17. So, far, we have witnessed an almost classic panic followed by a euphoric, “the worst must be over” and “we don’t want to miss out” 40% relief rally followed by normal profit taking and uncertainty.

Now, we are in the middle of “earning season” and markets are moved by reported profits; how those profits compare to previous estimates by analysts, and “guidance” from the reporting companies. If companies report good earnings but the CEO is pessimistic about the future, the stock probably goes down. If companies report bad earnings, but beat “expectations” the stock may go up. What in essence is happening is that buyers are waiting for what they believe is evidence of profits in the future—“show me the money”.

There is no doubt that the economy is still a mess. Harley Davidson reported a 30% year over year decline in shipments. GE reported revenues were down 17%. The Fed reports they are concerned about labor markets and increased their unemployment estimates. They indicated that banks could foresee substantial losses in loan portfolios. They described the recovery and current situation as “fragile”. Commercial real estate is in the process of being revalued and recapitalized. Many fear that the pending recovery will be ”jobless” with growing GDP but high unemployment. Citizens are becoming impatient and the new President’s approval rating is falling.

So why does all this bad economic news not result in another leg down for the market, beyond the 7% we recently experienced? Remember that market prices for stocks are driven by expected future profits as well as the willingness of buyers to move out of cash and cash equivalents. As of May 31, 2009, cash/cash equivalents held by individuals and institutions totaled around $7.9 TRILLION—almost enough to buy the entire market value of all 500 companies in the S&P500. If we return to historical norms, nearly $4 TRILLION of cash is waiting to go back into the market. Much of this cash is what I refer to as “anxious” because short term interest rates are so low and people are afraid that markets will “take off” and leave them behind. For most investors, especially mutual fund and pension fund managers, the only thing worse than suffering a decline is not making it up--missing out on the recovery.

So if people from Missouri are skeptical and want to be shown real facts before they believe, the market now has the same attitude. Investors need to be “shown” that the companies are making profits and that future profits will be higher before they will believe that markets will go up. But, when the majority do believe, the tsunami of cash coming into the market may result in impressive gains. The difficult part will be figuring out just how much “proof” the majority will need to make them “believe” that future profits will be higher. This proof will come in the midst of continuing bad news about the present and near future state of the economy. What do they need to be “shown” for them to support their beliefs? One key may be related to improving productivity. There is growing evidence that productivity is increasing dramatically and will show up in corporate profits significantly before the employment picture improves.

Hope and Worry are likely to continue their battle. The Worry crowd will probably drive the market down periodically because of bad news. But investors are generally an optimistic group and those with a cautious but hopeful long term view are likely to be rewarded. We believe the current situation is “yellow” for the near to medium term, but “green” for the long term. Solid companies that have “staying power” with little debt, growing productivity, good products, and reasonable present earnings represent good opportunity and value.

This commentary and information is provided for the benefit of clients and should not be considered a sales presentation.


See http://www.waynestrout.com/ for more complete info: Investment advisory services are offered by WS Wealth Managers, Inc., an investment adviser registered with the Commonwealth of Pennsylvania and the State of Maryland. Wayne Strout is an Investment Adviser Representative with WS Wealth Managers Inc. in addition to serving as Chief Investment Officer of the firm. Scott Sebring is an Investment Adviser Representative and Vice President. Wayne Strout and Scott Sebring, dba WS Wealth Managers. Securities offered thru Glen Eagle Advisors LLC, Member of FINRA And SIPC, with clearing thru Pershing LLC, Division of Bank of New York Mellon Corporation, also Member of FINRA and SIPC. FOLIO Advisor program is available through FOLIOfn Investments Inc. a Member of FINRA and SIPC. WS Wealth Managers Inc. is not affiliated with Glen Eagle Advisors LLC, Pershing LLC or FOLIOfn Investments Inc..

On Economic Forecasts..Chance Favors a Prepared Mind

Quote from speech by Ben Bernanke at Boston College Commencement 5/22/09:

“As an economist and policymaker, I have plenty of experience in trying to foretell the future, because policy decisions inevitably involve projections of how alternative policy choices will influence the future course of the economy. The Federal Reserve, therefore, devotes substantial resources to economic forecasting. Likewise, individual investors and businesses have strong financial incentives to try to anticipate how the economy will evolve. With so much at stake, you will not be surprised to know that, over the years, many very smart people have applied the most sophisticated statistical and modeling tools available to try to better divine the economic future. But the results, unfortunately, have more often than not been underwhelming. Like weather forecasters, economic forecasters must deal with a system that is extraordinarily complex, that is subject to random shocks, and about which our data and understanding will always be imperfect."

"In some ways, predicting the economy is even more difficult than forecasting the weather, because an economy is not made up of molecules whose behavior is subject to the laws of physics, but rather of human beings who are themselves thinking about the future and whose behavior may be influenced by the forecasts that they or others make. To be sure, historical relationships and regularities can help economists, as well as weather forecasters, gain some insight into the future, but these must be used with considerable caution and healthy skepticism.”

“In planning our own individual lives, we all have a strong psychological need to believe that we can control, or at least anticipate, much of what will happen to us. But the social and physical environments in which we live, and indeed, we ourselves, are complex systems, if you will, subject to diverse and unforeseen influences. Scientists and mathematicians have discussed the so-called butterfly effect, which holds that, in a sufficiently complex system, a small cause--the flapping of a butterfly's wings in Brazil--might conceivably have a disproportionately large effect--a typhoon in the Pacific. All this is to put a scientific gloss on what you probably know from everyday life or from reading good literature: Life is much less predictable than we would wish. As John Lennon once said, "Life is what happens to you while you are busy making other plans."

"Our lack of control over what happens to us might be grounds for an attitude of resignation or fatalism, but I would urge you to take a very different lesson. You may have limited control over the challenges and opportunities you will face, or the good fortune and trials that you will experience. You have considerably more control, however, over how well prepared and open you are, personally and professionally, to make the most of the opportunities that life provides you. Any time that you challenge yourself to undertake something worthwhile but difficult, a little out of your comfort zone--or any time that you put yourself in a position that challenges your preconceived sense of your own limits--you increase your capacity to make the most of the unexpected opportunities with which you will inevitably be presented. Or, to borrow another aphorism, this one from Louis Pasteur: "Chance favors the prepared mind."”

Complete speech available:

http://www.federalreserve.gov/newsevents/speech/bernanke20090522a.htm

At WS Wealth Managers, we always tell our clients that Preparation is more important than Predictions which is another way of saying what Louis Pasteur said: “Chance favors a prepared mind”. Our view is that predicting the short term micro or macro economic future is like predicting the weather—we can only speak in probabilities. On the other hand, predicting what will happen can be done with much more precision than predicting when it will happen. (Assuming the predictor is intelligent and informed.) We can predict that Summer follows Winter. We know that Winter nor Summer do not go on forever. Being prepared is all about knowing what will happen—knowing that when it happens, you will be prepared to take a certain action that benefits you.

Hope vs Worry

In February I wrote: “During periods of high volatility, and even in the middle of very tough economic times, markets can go up a lot.” This continues to be a true and important statement. Since the March 9 “bottom” stocks are up a lot. Is it time to throw caution to the wind? I think not.

Markets are created by buyers who have hope and sellers who have worry. Times of change are characterized by the tension of two competing fears: The Fear of Loss vs. the Fear of Missing Out.

Markets in the short term are driven by these emotions and sentiment. Hence, logic is almost useless as a predictive tool in the short run. In the long term however, markets are priced by the profitability of companies, which is driven by economic activity and increases in productivity over the long run. Logic can be very useful as a predictive tool in the long run.

From it’s peak of nearly $65 trillion in 2007, World Stock Market Capitalization fell below $30 trillion in March 2009. This type of decline has no explanation other than a global panic driven by a level of emotion (fear) and a fall in housing prices that I have not seen in my lifetime. Since this “bottom” in March, it has risen dramatically. In April alone, it rose $4.2 trillion. The only logical explanation is the recent rally is simply a realization that the previous decline was overdone.

You will hear the “worry” crowd pontificating that markets cannot recover until the economy improves. There are many signs that the world economy is still in a great deal of trouble. Unemployment is rising. House prices may fall further. People are spending less. The “hope” crowd however will point out that there are many “green shoots” or signs that things are on the mend: Consumer Sentiment is up; Housing has never been so affordable; Governments worldwide are proactive and are implementing unprecedented pro-growth initiatives; There is a great deal of cash sitting on the sidelines, earning little interest income and poised to enter the stock market. Both crowds are correct. But, most importantly, markets tend to turn upward ahead of the economy.

Within the “worry” crowd is a group who fear that our best times are behind us. They not only fear another decline in the short term but also a long term reduction in enterprise profitability and hence value. Within the “hope” crowd is a group that figures the worst is over and that good times will soon return. Both groups are probably incorrect.

The point here is that good times will return. The unknown is only really how soon and how fast. World stock markets were probably overvalued at $65 trillion in 2007. (Knowing what we now know about excess borrowing and debt.) They were undoubtedly undervalued at $30 trillion in 2009. A case can be made that their “fair” value is between $40-50 trillion. Markets therefore have room to rise. But, their rise is likely to be a roller coaster ride of ups and downs: Hope vs. Worry.

So, investors with a long term outlook should stay invested with a cautious outlook and cash should be deployed cautiously. Continued recession and a recovery with inflation are both very possible outcomes. What you invest in will be very important. Good advice has never been more valuable.

Perspective from 1933

February 2009 closes with a monthly decline in the S&P500 of 11%. It fell from 825 to 735. Headlines are “The Worst February Market Drop Since 1933!” (The S&P500 fell 18.1% in February 1933.) Wow. I guess such sensationalism sells newspapers and TV advertising, but for investors:

Does this mean ANYTHING? Let’s put it in perspective… (You will probably not read these facts in the newspaper or hear it on TV.)

In March 1933, the S&P500 rose 3.87%. In April 1933, it rose 42.87%. In May 1933 it rose 16.46%. And in June 1933, it rose 13.50%. From the end of February 1933 to the end of June 1933, the S&P500 rose 196%. That’s almost double! If history repeated with the same percentage increase, the S&P500 would rise from 735 to 1440!

Another interesting tidbit: The Dow Jones Industrial Average rose from 53.84 to 62.10 or UP 15.34% on March 15, 1933. This continues to be largest one day rise in history—in the midst of the worst depression in history. (The Dow is up 131 times to 7062 as of 2/27/09.)

Nobody, including me, is predicting such a rise, but the facts do tend to put things in perspective. During periods of high volatility, and even in the middle of very tough economic times, markets can go up a lot.

When comparing now to 1933, let’s look back to some highlights:

Nazi leader Adolf Hitler was appointed Chancellor of Germany in January. (Not exactly a bullish sign.) An attempted assignation of President-elect Franklin Roosevelt occurred in February—He was inaugurated in March and gave his “The only thing we have to fear is fear itself” speech. Also in March, President Roosevelt declared a “bank holiday” closing all US banks for one week. 4000 banks failed in 1933, on top of 5700 banks that failed the previous four years. 14 million Americans were unemployed—25% of the workforce. The legislative climate moved from conservative to liberal with lots of government spending and programs. Here is a quote from the newly elected President Roosevelt:

“Throughout the nation, men and women, forgotten in the political philosophy of the Government, look to us here for guidance and for more equitable opportunity to share in the distribution of national wealth… I pledge myself to a new deal for the American people. This is more than a political campaign. It is a call to arms.”

1933 was definitely a scary time. Nobody was then predicting an immediate end of decline. While the news today sounds a little bit similar, few would argue that the situation is as dire now. But, even in the middle of those terrible times in 1933, the stock market almost doubled in value during March thru June. When comparing the present to the past, it is important to put things in perspective.

Nobody can predict what the market will do in March, April, May or June 2009. J.P. Morgan stated the only true prediction, when asked to predict the stock market: “It will fluctuate”.

This commentary and information is provided for the benefit of clients and should not be considered a sales presentation.


See http://www.waynestrout.com/ for more complete info: Investment advisory services are offered by WS Wealth Managers, Inc., an investment adviser registered with the SEC. Wayne Strout is an Investment Adviser Representative with WS Wealth Managers Inc. in addition to serving as President/CEO and Chief Compliance Officer of the firm. Scott Sebring is an Investment Adviser Representative and Vice President. WS Wealth Managers Inc. is not affiliated with Glen Eagle Advisors LLC or Pershing LLC. Wayne Strout and Scott Sebring, dba WS Wealth Managers. Securities offered thru Glen Eagle Advisors LLC, Member of FINRA And SIPC, with clearing thru Pershing LLC, Division of Bank of New York Mellon Corporation, also Member of FINRA and SIPC.

Three Important Hidden Risks to Consider

So far in February we have a 6.7% decline in the S&P500. We are near the November 2008 low and down nearly 50% from the peak in October 2007. Our new President’s stimulus package, along with mortgage assistance to hopefully stabilize the housing market, and a credible promise to stabilize the banking system has not produced any improvement in market psychology--YET. Mr. Market (see last Weblog) is horribly depressed as he hears the two factions in Washington debating the merits of the process—the un-fairness of it all---and the long term consequences. Many that hoped for a big rally when the stimulus program was passed are now disappointed and disheartened. When will this downward momentum stop? (Remember, Mr. Market does not have any idea of what your investments are really worth!)

You have already experienced the reality that the value of your investments will decline and that you will suffer unrealized losses. A Down-a-lot market surprise has happened. This occurrence is real and recent. There is a danger that you may make the error of Recency Bias, defined as the tendency to be excessively affected by the pattern of recent data. This is the first of what I like to call the “hidden risks of investing”.

The second risk is inflation. It has been a long time since we have experienced double digit inflation, but with huge government deficits and a lot of monetary stimulus, the risk is real. Cash and bonds perform poorly in an inflationary environment.

Another important risk to understand is defined as Benchmark Risk. Of all risks, this is probably the least understood by most investors. There are many fancy technical definitions and measurements used by professional money managers and academics, but the basic principle is reasonably easy to understand. The first step in constructing an investment portfolio is the selection of the correct Asset Allocation and the corresponding Benchmark for you. This can be a complicated process, but for the sake of discussion, let’s assume that one possible Benchmark is the well known general domestic all-equity market index known as the S&P500.

A Benchmark is the standard to which we compare results. Benchmark Risk is created when we deviate from the basic make up and character of that standard. For example, if our Benchmark is the all-equity S&P500 and we decide that our portfolio will move to all bonds and cash. In this case, we have created a risk that the performance of our portfolio may not be comparable to the Benchmark--and that we will not reach the intended long term goal. Here’s a quote from Ken Fisher in his excellent book that I recommend: The Only Three Questions That Count (John Wiley & Sons, Inc.- 2007) “The only time I am ever comfortable beating the benchmark by a lot—taking on massive amounts of benchmark risk---is when I believe down-a-lot is by far the likeliest scenario.”

Nobody can predict market movements with precision. Most people can assign probabilities to four possible outcomes: Up-a-lot, Up-a-little, Down-a-little, or Down-a-lot. The probabilities may not be right, but they are what the investor believes. I agree with Fisher: Jumping out of and into the market and exposing your “investment” portfolio to massive Benchmark Risk by holding large amounts of cash in excess of your known 3-5 year cash needs, is essentially only wise if you are convinced that there is a very high probability of a “Down-a-lot” scenario.

After a real Down-a-lot happening, many choose to believe that “we should have seen it coming”. The word “should” and “could” are much different. Very few, if any professional investment managers would stipulate that anyone could have predicted the last six months of market decline with any degree of confidence. (Some things are un-knowable.) And, taking on big Benchmark Risk can be very costly. In other words, being “safe” in reality may be very risky. Managing risks is what life and successful long term investing is all about. Avoiding risks is a sure path toward lower than average returns.

You should be investing because you need long term returns that appreciably exceed inflation—increasing purchasing power. If you have enough without subjecting yourself to investment risks, then by all means buy more CD’s, short term Treasuries, and hold cash. Then, hope that high rates of inflation are only temporary.

History teaches that a future Down-a-lot scenario is less likely after a 50% market decline. So taking huge Benchmark Risk now is even more risky than usual. The reward is probably not worth the risk. The risk of Recency Bias is very high. What I call “going to cash” at the wrong time can make it difficult or even impossible for you to reach your long term goals or even to recover from the most recent downturn.

While taking on big Benchmark Risk is usually not wise, taking on some smaller risk in the form of tactical increases in sector allocations may be wise. The reward may be worth the risk. (This is part of the value received by active investment management.) Buy, Hold and Hope as an investment strategy may no longer be optimal. We are advising that most portfolios could benefit by overweighting in Energy and Health Care. Some form of hedging against the risk of rising long term interest rates and inflation may also be appropriate. (Call us for more explanation and how these strategies might apply to you.)

In addition, a re-evaluation of the correct Asset Allocation and Benchmark for you is also very appropriate. Circumstances change and your investment portfolio should be set up appropriately for you.

Where is the market going? History teaches us that it is going up. What we don’t know is when. We are telling our clients that there are two scenarios that are highly probable (but not certain). The first is “Investment Purgatory” for a couple years; the second is “Investment Heaven with Inflation” sooner than expected. We advise looking for long term investments that will do better than average in both scenarios. (Call us for more explanation.)

Nobody knows when this market turns. By the time that it looks certain that the market is going up, it will most probably have already risen by a great amount. Missing out will be more permanent than any temporary downturn. This is the real cost of Benchmark Risk.


This commentary and information is provided for the benefit of clients and should not be considered a sales presentation.


See http://www.waynestrout.com/ for more complete info: Investment advisory services are offered by WS Wealth Managers, Inc., an investment adviser registered with the SEC. Wayne Strout is an Investment Adviser Representative with WS Wealth Managers Inc. in addition to serving as President/CEO and Chief Compliance Officer of the firm. Scott Sebring is an Investment Adviser Representative and Vice President. WS Wealth Managers Inc. is not affiliated with Glen Eagle Advisors LLC or Pershing LLC. Wayne Strout and Scott Sebring, dba WS Wealth Managers. Securities offered thru Glen Eagle Advisors LLC, Member of FINRA And SIPC, with clearing thru Pershing LLC, Division of Bank of New York Mellon Corporation, also Member of FINRA and SIPC.

“Early is on time, on time is late, and late is unacceptable”

January ends with a 8.6% decline in the S&P500. Our new President has been inaugurated and his new executive team is mostly in place. So what happened to the “Hope Rally” that many expected?? Reports about the economy continue to feed fears of a continuing downturn. In order to “sell” a government stimulus plan, along with continued support for financial firms, there is no shortage of politicians warning that “things could get a lot worse!” (Not good rhetoric for markets.)

As mentioned in my previous weblog: “Bear markets do not end until investor psychology changes in regards to the future. They do end when investors believe that all aspects of the economic future are “priced in” and that even though bad economic news may continue—it is expected. And, most importantly, bear markets end when there is HOPE and expectation that the future will be better in the foreseeable future. Always remember that the price of a stock is the market’s guess as to the value of the stock’s FUTURE earnings—not just for the next year or two but many years into the future.”

I think it time for more uncommon wisdom from Warren Buffet:

“Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business.

Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his. Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market's quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.

Mr. Market has another endearing characteristic: He doesn't mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you. But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren't certain that you understand and can value your business far better than Mr. Market, you don't belong in the game.”

At this time of the year, the press will drag out the old “What happens in January determines the stock market for the whole year”. This old saw is reportedly around 80% accurate. But, there is another “indicator” that is almost accurate 80% of the time: If the Super Bowl winner is a team that can be traced back to the original NFL, the market goes up that year! (Since both teams in the 2009 Superbowl can be traced to the old NFL, the market is predicted to rise!) The market has “tested” the November 20th bottom of 752 for the S&P500 more than once. There are those that will claim that this has “confirmed” the bottom and the market is likely to rise.

These forms of what I like to call “pattern searching” can lead to very poor judgments about investing. While we can learn from history, trying to predict the future by using over-simplifications of the past is unwise.

Remember several important points:

Markets often rise, even when the present economic news is not very positive. Markets tend to ANTICIPATE the future. Markets are moved by surprises—not what is expected. Prices of stocks are the market’s guess as to the value of the stock’s FUTURE earnings—not just for the next year or two but many years into the future. And, as Warren Buffet reminds us: “Mr. Market is there to serve you, not to guide you.”

Mr. Market is now so depressed, he has cut the price of equities nearly in half. In fact, he has set prices so low, that the annualized ten year return for large cap stocks from 1998 thru 2008 (-1.5%) is worse than anytime in history since 1810. The previous record was during the Great Depression 1928 thru 1938 with -1.3%. We have just experienced the worst 10 year “bear market” in history.

In order to be a successful investor, you must stay in the game. Yes, you will experience downs (known as unrealized losses) but in order to get the average return, you must be invested so that you get the full benefit of the upside. And, if you are fortunate to hold cash when the market is down, you can exceed the average by buying low.

It has been said that “the early bird gets the worm”. On the other hand, it has been said, “the second mouse gets the cheese”. (I’d rather be an eagle than a mouse---and smart investors are supposed to be more careful than your average mouse.)

Where is the market going? History teaches us that it is going up. What we don’t know is when. We are telling our clients that there are two scenarios that are highly probable (but not certain). The first is “Investment Purgatory” for a couple years; the second is “Investment Heaven with Inflation” sooner than expected. (Call us for more explanation.) We advise looking for long term investments that will do better than average in both scenarios.

Nobody knows when this market turns. By the time that it looks certain that the market is going up, it will most probably have already risen by a great amount. Missing out will be more permanent than any temporary downturn…so:

“Early is on time, on time is late, and late is unacceptable”

This commentary and information is provided for the benefit of clients and should not be considered a sales presentation.

See http://www.waynestrout.com/ for more complete info: Investment advisory services are offered by WS Wealth Managers, Inc., an investment adviser registered with the SEC. Wayne Strout is an Investment Adviser Representative with WS Wealth Managers Inc. in addition to serving as President/CEO and Chief Compliance Officer of the firm. Scott Sebring is an Investment Adviser Representative and Vice President. WS Wealth Managers Inc. is not affiliated with Glen Eagle Advisors LLC or Pershing LLC. Wayne Strout and Scott Sebring, dba WS Wealth Managers. Securities offered thru Glen Eagle Advisors LLC, Member of FINRA And SIPC, with clearing thru Pershing LLC, Division of Bank of New York Mellon Corporation, also Member of FINRA and SIPC.

Is it over yet?

In last month’s commentary I wrote: “Nobody knows where the bottom is exactly, but this decline (in early to mid October) is now exhibiting the normal historical pattern of maximum fear. It is probably near the ultimate CAPITULATION point.” I warned however that the amount and duration of large hedge fund liquidations could change the normal pattern.

History teaches us that bear market bottoms are typically “retested” at some point. Usually this is 30-40 trading days after the first potential bottom. This 30-40 trading day period is not yet complete, but will be soon. I believe there are two major factors that may also affect the “normal” bear market behavior. The first is the change of government administration. The second is the almost unprecedented bad economic news coupled with unprecedented pessimism in near term future economic outlooks.

Bear markets do not end until investor psychology changes in regards to the future. They do end when investors believe that all aspects of the economic future are “priced in” and that even though bad economic news may continue—it is expected. And, most importantly, bear markets end when there is HOPE and expectation that the future will be better in the foreseeable future. Always remember that the price of a stock is the market’s guess as to the value of the stock’s FUTURE earnings—not just for the next year or two but many years into the future.

A study of historical stock market (S&P500) returns in the 1930’s disclose some very interesting facts. After a terrible three year decline from October, 1929 to the 1932 election, with a “transformational” Democrat replacing an unpopular Republican, the market declined 5% in November immediately after the election. But, from October 1932 through October 1933 it rose almost 34%. In the four years from October 1932 to October 1936, the market rose nearly 270%. Yes, it went UP 2.7 times over four years! This was in the midst of the Great Depression! (In that 1933 period when the market rose 34%, unemployment reached 25%. Although the U.S. economy began to recover in the second quarter of 1933, the recovery largely stalled for most of 1934 and 1935.) The point is that markets often rise, even when the present economic news is not very positive. Markets tend to ANTICIPATE the future.

In the short run markets are mostly affected by psychology. Maximum fear is almost always the bottom. Can fear get worse? It depends on whether economic news is worse or better than previously feared. (We have probably already seen the market's reaction to fears regarding possible tax policy changes by the new administration.) When fear is replaced with hope, markets change direction. Sooner than later investors determine that no matter how bad things may become in the near future—things will get better and good times will return!

No, it is not yet over. We will most likely see continued volatility. But, for your long term investments, it is probably not a good time to exit. And it may be an excellent time to add to positions in high quality equities and mutual funds.

This commentary and information is provided for the benefit of clients and should not be considered a sales presentation.

See http://www.waynestrout.com/ for more complete info: Investment advisory services are offered by WS Wealth Managers, Inc., an investment adviser registered with the SEC. Wayne Strout is an Investment Adviser Representative with WS Wealth Managers Inc. in addition to serving as President/CEO and Chief Compliance Officer of the firm. Scott Sebring is an Investment Adviser Representative and Vice President. WS Wealth Managers Inc. is not affiliated with Glen Eagle Advisors LLC or Pershing LLC. Wayne Strout and Scott Sebring, dba WS Wealth Managers. Securities offered thru Glen Eagle Advisors LLC, Member of FINRA And SIPC, with clearing thru Pershing LLC, Division of Bank of New York Mellon Corporation, also Member of FINRA and SIPC.