February Recap: Lots of Movement – No Progress by Jack Moller

The recent market volatility continued in February with an initial sharp decline to a low on February 11 followed by a second-half of the month recovery for most major stock indexes.  The net effect of the wild ride was that the S&P 500 ended the month just slightly lower for its third straight monthly decline, though not nearly of the magnitude of the sharp selloffs in December and January.     As I write this commentary in early March, the late month recovery has gained speed.  It will be interesting to see how far it goes and if possibly the pattern shifts to early month strength followed by late month weakness. 

Keeping Perspective - A Few Observations

As volatility continues to ratchet up, we think it is important to keep a long-term perspective so you don’t get hung up on daily gyrations.  With this in mind, let’s review where the market stands:

1. Aging Bull Market.  We are just now crossing over into an eighth year of this bull market.  While the high last May might signal the ultimate top, we have yet to experience a bear market-defining 20%-plus drop in either of the major market indexes – the Dow Industrials or the S&P 500.   “Old” bull markets can get older before they roll over into a cyclically inevitable bear market but certainly after a tripling of prices from the lows, risk has increased.  Nobody knows if this bull market has more to run or when it eventually turns down how far it might fall.  Nonetheless, history shows two painful bear markets that followed their own extended bull markets – the Roaring ‘20s bull lasted nearly six years before the 1929 Crash followed by The Great Depression and the long bull of the 1990s ended with the dot-com blow up.  My point is definitely not to predict but to be cognizant of the need to be careful as the current bull market is the second longest in modern market history.

2. Great Experiment Continues – Doubling Down – Crushing the Retirees.  As financial advisors, a primary focus we have is to help our clients move into and navigate retirement.  Unfortunately, the traditional bulwark of “safe” fixed income as a major retirement component just doesn’t work anymore.  The “emergency” interest rates of 0% instituted during the dark days of 2008-09 have been basically stuck since then.  While seven years later, the Fed finally nudged rates back up by a negligible 0.25% (negligible to retirees trying to find safe fixed income), the rest of the world went in the other direction.  In particular, Europe and Japan have instituted negative rates in hopes that will help.

The conundrum as I see it is that these really incomprehensible government policies and interest rates have devastated the retiree forcing most to take on more risk by adding equities.Yet, these investors, without a steady income from employment, may be quite ill-equipped to handle any kind of a big market decline.To add to the conundrum, these unprecedented steps have yet to ignite strong growth anywhere in the world.  

3. The U.S. Markets Have Been Flying Solo.  While the large U.S. stocks have continued to attract money and avoid a technical bear market, much carnage has been inflicted elsewhere in the U.S. and in the world.  For example, at the early January lows, the Dow Jones Transportation average was off 30%, the Russell 2000 index of smaller companies was down 23%, MSCI World Ex USA index was down 25.7%, and the MSCI Emerging Markets index had fallen 37.5%!  As I write this, the S&P 500 is continuing its up-and-down, sideways movement and is at the same level it was in mid-2014 and just 7% off the high from last May.  It will be interesting to see if these divergences eventually shift in the other direction with other markets outperforming our blue-chips.  My guess is this would be likely whenever the dollar stops its ascent and possibly begins to decline. 

There are certainly many interesting and challenging occurrences in the markets and the economy these days.  While we don’t want to ever try to get in the prediction business, we do believe that it is critical to have effective strategies in place to be able to endure possible turbulence while ensuring we will be onboard to benefit whenever the markets resume their inevitable march higher.