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Market Flash Report- Dow’s Record Point Drop

In light of yesterday’s record one-day loss of almost 1,200 Dow points, we felt it was of high importance to provide some timely thoughts on the recent market volatility.
 

What We know

  1. While Monday, February 5, 2018, saw the most significant “point” move in the Dow Jones Industrial Average in history (down 1,175.21 points on the day, and 1,597 points on an intraday basis), it was by no means the most significant percentage (%) change in history.  According to Investor’s Business Daily, there have 25 other instances since 1960 where the % change was more significant.  Still a very bad day nonetheless but not as historic as the headlines might make it seem.
     
  2. Through yesterday’s market action most major financial markets we monitor have since lost their 2018 year-to-date percentage gains.  While not ideal, we are still trading at (mostly) 4th quarter 2017 price levels, which may suggest that rapid rise in January 2018 was just “too far, too fast.”
     
  3. Two record stock major market-related streaks ended with the last two trading days. These include (data uses S&P 500 Index): 
     

      Longest Stock Rally without a 3% Correction – Ended 2/2/2018 after 448 days

      2nd Longest Stock Rally without a 5% correction – Ended 2/5/2018 after 578 days

  4. Economic data readings for the US and outside of the US show continued steady growth. Analyst earnings estimates for the S&P 500 have been increasing as a result of this and the expected economic effect of the 2017 Tax Cut & Jobs Act
     
  5. Interest rates are rising (both short term and long term) as has recent inflation data. This has been considered one of the potential culprits of the market’s sell-off in the last week
     
  6. Market’s DO have down-turns and negative moments.  Since President Trump was elected, the market has been on a rapid, low volatility rise, that perhaps has lulled investors into a level of false complacency.  The reality is that market go Up AND Down.  The recent volatility is consistent with market history and is more the norm than what we have seen over the last 14 months.
     
  7. Media, specifically financial news related, tend to love the panic and we note that a popular finance station is back on prime- time TV with their “Markets in Turmoil” evening special.  These specials may be meant to sell TV ads and not to educate you on how to manage your investments or financial plan.  We would argue that it may be best to turn off the financial media unless your investment time frame is that of a short-term stock trader and even then it’s a stretch.
     
  8. Market participants tend to be emotional and can overshoot reactions both on the upside and on the downside.  Keeping the perspective of your investments as it relates to your ultimate financial plan or objectives is more important than reacting emotionally to the news of the day.
     
  9. Even with the poor showing of the last week, global stock markets, by and large, are still in a multi-month up-trends.
     

What We Don’t Know (Definitely)

  1. What is the catalyst of the recent selling?

     Some are blaming higher rates and the threat of looming inflation.  Other’s claim the market is too high or too expensive.  We have even heard rumblings of a significant unwind in volatility derivative markets and the use of computerized algorithmic trading as potential catalysts.  It does not appear that any of these are, at this point, are pointing to or precedents of an economic recession.
     

  2. How severe could the correction be?

     Impossible to say but bouts of selling are usually not a one day or one-week event if we use history as a guide.   Corrections are often defined as peak to trough losses of greater than 10%, but no more than 20%.  On average, they have historically ended after a 12-15% peak to trough loss.  By using this as the measuring stick, there could be further downside left to unfold. 
     

  3. Is this the start of a bear market? 

    Bear markets are often characterized as a market that loses more than 20% from its peak. Since the ultimate financial crisis lows in 2009, there have been various market moving moments that many pundits may have declared of as the start of something more ominous: 

    2009
    Bank & Auto Bailouts
     
    2010 Greece Bailout and Flash Crash 
     
    2011 Japanese Earthquake, US Debt Ceiling & Credit Rating Downgrade
     
    2012 Euro Debt Contagion
     
    2013 Taper Tantrum
     
    2014 Crude Oil Price Crash
     
    2015 Chinese Yuan Devaluation & Global Economic Slowdown
     
    2016 Brexit & Presidential Election 
     
    2017 Political Gridlock/Dysfunction & North Korea Threat
     
  4. Will this be just another headline of the year or the start of something else?

     It may be too early to tell given some of the other factors we noted earlier.
     

  5. Is now a smart/good time to buy?

    It may depend on your time frame, risk tolerance, current holdings and/or financial objectives.  Most market sell-offs/panics have historically been reliable entry points, unless they occur in bear markets which may then require an extended holding period to see potential positive returns. Another potential factor to consider is the investors ability to persevere through further downside in case the investment is made prematurely.
     

  6. Should I change my investment strategy?

    Ditto as to the above but we would add that it may additionally depend on your risk appetite and your stomach for volatility (or lack thereof).While we have designed a multitude of strategies at BluePrint to help address most investors needs and preferences, we sometimes see people rushing to the exits when they aimed for a stock focused approach and the waters get rough.  Or sometimes we see investors get too conservative when they should be seizing on a potential opportunity.  Let us assist you through these decisions by leveraging our experience and available resources to help chart the appropriate course of action.

What Might Happen Next

Volatility may pick up as market participants discount new information and how it might impact the economic and market outlook. As of this time and in our opinion, the weight evidence points towards more of corrective environment than a bear market environment.  We reserve the right to change this outlook as new information comes in.

For clients invested in a Risk Managed or Tactical Investment Model(s)
We will be taking defensive measures if markets continue to display weakness.  While not appropriate for all investors, our mandate in these approaches is “protect first, grow second” and we use a rules-based, weight of the evidence approach when making these tactical shifts.  Although market highs were just reached on 1/26/2018 (Just six trading sessions ago), the selling has been “brisk” enough to begin considering potential defensive measures.  These measures can be accomplished by raising cash in portfolios, moving to lower volatility investments like bonds or purchasing inverse market ETFs.  If you are wondering on how and when this happens in your particular case, please reach out. 
For clients invested in Strategic or Individual Stock-Based Investment Model(s)
We plan to stay the course and when appropriate, re-balance the portfolio to the desired allocations to match the long-term mandates of the selected approach.

If you have further question or concerns, feel free to reach out!  As we navigate the markets together, It never hurts to have a one-on-one in person, web-based or phone conversation about anything that is top of mind.  

Disclosure: This commentary on this website reflects the personal opinions, viewpoints and analyses of the BluePrint Wealth Alliance, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by BluePrint Wealth Alliance, LLC or performance returns of any BluePrint Wealth Alliance, LLC Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. BluePrint Wealth Alliance, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.