Since mid-2018 the market has been stuck in a trading range. Reality is the market only advances to new highs twenty percent of the time. Eighty percent of investing is like roller coasting – up and down with no progress.
There are plenty of potentially disruptive issues to delay a real advance: near recession in Europe, higher taxes in Japan, unresolved tariffs, declining corporate sales and the contentious political fight in Washington.
Early this year, portfolios were adjusted to hold a defensive mix of investments. Even though the objective is portfolio growth, bonds, utilities, real estate and/or gold investments have protected accounts during repeated short-term market drops.
Disregarding many sources calling for new market highs, Mr. Market has repeatedly laid down to “take a nap.” The S&P-500 is currently priced for perfection expecting the Federal Reserve to fix every down turn.
The economic data touted by President Trump and the National Economic Council’s Director Kudlow is positive. There is ZERO indication that inflation is a threat and GDP growth is above 2%. All of which is good.
“Recessions are always hard to predict…there’s no reason’ for the economy to topple into recession. The usual suspects are missing. For instance, there’s no inventory overhang, nor is monetary policy too tight.”
Tariffs remain a cause for concern with investors and CEOs alike. When even agreements to meet are as fleeting as a gazelle, resolution is probably not on this year’s calendar.
Further, if the current impeachment headlines persist, the Chinese may decide it is easier to wait for our next election.
Most of our clients remember more than one October causing major damage to our portfolios. We are not forecasting an October collapse, but our portfolios are positioned with assets to mitigate current risks. We are prepared to sell positions in favor of cash if needed. When the next bear wakes from hibernation, our plan is not to hold and wait for a quick recovery. Recoveries often take many years. Pro-active portfolio management works to protect capital when the bull market ends.
We operate an active strategy rather than a “buy and hold” strategy (B&H) for several reasons. Even though B&H is very enticing, it is highly dependent on luck. Very few investors can hold through portfolio declines of thirty percent or greater which is an essential part of a buy and hold process.
It is true that in the long run stocks go up in price. It’s just that the long run can be more than twenty years.
Even waiting twenty years to be profitable at less than 1% in total is not what investors believe should be the result. Yet, that is the undisclosed truth in the Buy and Hold sales talk. If you do not need your money for a very long time, “Buy and Hold” may be a viable investment process for you.
A thirty to fifty percent market decline will not hurt Bill Gates or Warren Buffet who are well known for “just buy and hold the S&P-500.” Regrettably, most investors aren’t in their financial position.
We must make this decision every day for every exchange traded fund we hold.
Presently, 67% of S&P stocks are trading below their fifty-day moving average. This has our attention as a catalyst to become more defensive if market conditions do not improve.
A “buy and hold” process assumes that all investors are willing and able to sit still during a major market drop. We know it is not true for us and likely not for you. We are regularly monitoring every exchange traded fund in our portfolios to justify retention or replacement.
October is the beginning of another earnings reporting season for publicly traded companies. We are watching for improving trends.
We can easily schedule an on-line meeting or in person if you want more detail. Just call or email us.
Questions? Call us. 800-317-9119.