After reviewing a chart of the stock and bond markets in October, the image that comes to mind is a trampoline. Plenty of ups and downs to keep many investors on the edge of their seats. The S&P 500 closed close to the all-time high after swings over 5% both ways. Most bond funds have actually lost this month. It’s times like these that we want to remind clients to not think too short term, as trends can move slowly and then move very quickly. We believe there’s potential for big moves, which we’re prepared for. We are focusing on the fact that overall, the world economy is slowing, especially Europe, Japan, China, Canada, Russia, and Brazil.
Our primary concern today is the announcement by the Federal Reserve on October 29th. After many years of money printing, known as Quantitative Easing (QE), the Federal Reserve has decided to stop the printing presses. In June of 2010 the Federal Reserve stopped Quantitative Easing, and the economy and stock market floundered. In November of 2010, the Federal Reserve resumed Quantitative Easing, known as QE2, because the economy and market was not ready to “walk without crutches” yet. This ended in June of 2011, and once again, the economy and stock market suffered. Once again just one year later, history repeated itself just a few months later in November of 2011 when the Federal Reserve announced Operation Twist, which was a form of QE, which eventually turned into QE3 in September of 2012. Since September 21st of 2011, the Federal Reserve has been intentionally manipulating the markets through various tools, but that primarily came to an end on October 29th, 2014.
The question we must all answer today: Is the economy strong enough to move forward positively without manipulation from the Federal Reserve? The answer in 2010, and 2011, was no, almost immediately after QE ended. The stock market was up in 2012, 2013, and 2014 (barely), and we believe this is partially because of all the money printing the Federal Reserve has conducted.
We have taken a defensive posture in many of our portfolios. Many investors lost money in bond investments in 2013 when interest rates and bonds moved wildly. We keep a very close eye on bond yields because we want to shield our clients from losses whenever possible. Bond funds mostly lost in October, and we’ve taken note. In many of our portfolios, we suffered small losses in October, but we’ve moved a significant portion of our portfolios to cash both for safety, and also to have “dry powder” when the next opportunity arises. That may mean betting against the stock or bond markets with inverse funds, or just buying low for the next potential stock market rally. In any case, we’re prepared, and remaining diligent for what the next few weeks and months may bring.
It’s our hope that the economy and stock market is strong enough to walk without the crutch of QE, but we’re positioning most of our portfolios in a defensive posture, perhaps just temporarily, because we believe there’s a good chance history repeats itself a third time.
If you do not agree with this strategy, please contact us right away to discuss it. Please feel free to share this market commentary with family, friends, and business colleagues.
INTERESTING NOTES
When does it end? – The current bull market is the longest continuous bull market without a 10% correction since the crash of 1929 – MarketWatch, October 6, 2014
Volatility – October has seen eight of the fifteen biggest percentage drops in DOW history, including the three most devastating. On the other hand, October has also delivered five of the seven biggest rallies on the blue-chip average. – MarketWatch, October 16, 2014
Dealing with Stress – “A man is a fool if he drinks before the age of 50, and a fool if he doesn’t afterwards.” – Frank Lloyd Wright
How Much? – The top 10% of American drinkers, about 24 million adults over the age of 18, consume an average of 74 drinks a week, or about 10 drinks a day. They also account for well over half of the alcohol consumed in any given year. – The Washington Post, September 25, 2014
Working Hard – Americans work an average of 41 hours a week, compared with 38.4 in the U.K., 36.9 in Germany, and 35.7 in France. Nearly 30% of Americans work on weekends, and 26.6% do work from home after 10 pm. – Study by Royal Holloway University of London
Happy or Sad? – “Comparison is the thief of joy.” – Theodore Roosevelt
Cost of NASA – It costs nearly $2 billion each year to launch enough water into space – 6 tons per person – to sustain the six astronauts working aboard the International Space Station. – BBC News, September 25, 2014