Point View Wealth Management's Founder, President and Chief Investment Strategist, David Dietze, along with the firm's Managing Director and Portfolio Manager, John Petrides, comment in the Los Angeles Times on mistakes investors should avoid when the market heads south:


The duo's advice is part of a piece entitled "Making Sense of the Market Volatility":

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Since the start of February, volatility has increased in the stock market not felt since January of 2016 or seen since the Financial Crisis of 2008. There does not seem to be a sense of panic among investors, but more concern and curiosity as to what has caused this historic and dramatic sell off in stocks. 2017 was a banner year for the stock market. However, something very unusual happened, volatility was non-existent. The S&P 500 never finished a month in negative territory. Despite the Fed raising rates three times and headline risk of potential conflict with North Korea, investors continued to push stocks higher. The rally without risk created an unintended consequence: complacency. Those investors who should not take on more risk did because they were lulled to sleep by the lack of volatility (think Bitcoin). Now the last week has shaken those investors out of the trees and back to reality. So, what is causing this volatility?

Fears of Inflation

The catalyst to this sell off was the fantastic January Jobs report that came out on February 2nd. Not only did the US add more jobs than expected, the all-important wage growth increased to 2.9%, up from 2.5-2.6% which it had been stuck at for a couple of years. This set off a wave of fears that inflation is rising faster than expected and the Fed is going to have to raise interest rates more than the three hikes forecasted for 2018. Higher borrowing costs will slow business spending, reduce consumer’s ability to finance a car or a home, and slow the economy. This would be bad for stocks. Despite looking to sing the same tune, the change in Fed Chair from Yellen to Powell has added uncertainty to monetary policy given the pivot in the wage data.

Strong US Dollar

The strong jobs report led to a rally in the US Dollar. The Federal Reserve is much closer to normalizing monetary policy than any other major economy in the world. Investors have dumped international stocks (which outperformed US stocks in 2017) quite hard. Companies are more global today than ever before and receive a substantial portion of their revenue and profit outside the US; a stronger dollar could lead to weaker profits because of currency translation.  

The Big Boys Missed Expectations

Earnings season has been stellar so far relative to analyst expectations. According to FactSet, as of February 2nd, with 50% of companies in the S&P 500 reporting, 75% have beaten analyst expectations. However, a handful of the mega-cap companies have missed. Exxon Mobil (XOM), Chevron (CVX), Apple (AAPL) and Alphabet (GOOGL), given the size of their market capitalization, are major weights in the index. When they move, so does the market. On the same day that the jobs data came out, these companies were down because of their earnings results. This exacerbated the selloff.

Rise of the Machines

History doesn’t repeat itself, but it often rhymes. One week has passed since the jobs data was released and the market volatility has continued. What has since been revealed is some institutional investors lulled to sleep by the lack of volatility in 2017 made bets in derivative instruments that volatility would never return. Once the jobs data was released and investor sentiment changed, those investors were caught flat footed. Many apparently used margin (borrowed money) to invest in these products, which is like pouring kerosene on the fire. This situation arouses memories of the subprime mortgage funds in 2008, or even Long Term Capital Management in 1998.

What’s Different This Time

Although many have lamented over the amount of regulatory pressure being put on the banking system since the crisis, banks are flush with capital. As of now the banks do not appear to be tied to these derivative instruments in a meaningful way, removing the fear of a systemic financial collapse that was witnessed in 2008, and potentially in 1998, until Chairman Greenspan and the Fed bailed out the banks.

The macro and micro data are very strong. Unlike 2008, the global economy is growing in a synchronized fashion. Central banks stand armed and ready to act if necessary to provide liquidity to the system. Company balance sheets are flush with cash. Companies are beating analyst earnings expectations not by simply cutting costs or buying back stock, but through top line growth. Demand is back! Companies are looking to invest for the future. Finally, fiscal policy is very pro-business, at least in the US, which is a healthy runway for companies to grow.

What Should You Do?

Don’t panic. If you feel the urge to sell simply because the market is down, step away from the computer and go for a walk. Don’t watch financial news media all day. Scary headlines of a several hundred-point market drop is there to scare you.

Also, focus on percentage moves, not point moves. For example, on 12/31/1992, the Dow closed at 3,301. On Friday the Dow closed at 24,167. So, a 1000 point move today is not as catastrophic as a 1000 point move 25 years ago!

Appreciate your diversified portfolio. This is the time when the fixed income and conservative allocation of your diversified portfolio earns its money.

Take advantage of the market sell off.  Since 1987 we have seen three major drawdowns, ranging from 36% to 54%, in the US stock market.  Each proved to be marvelous buying opportunities, but if the drawdown left you unable to pay your bills or to sleep at night, it didn’t matter.

What’s Next?

In terms of where we go from here, we must brace for further volatility.  A big driver behind the current bull market has been quantitative easing (QE), also known as money printing.  That resulted in TINA (There Is No Alternative), meaning that given such low interest rates stocks were the best place in town.

Key to the path of markets going forward will be the pace of monetary tightening.  The bullish outlook is that the pace will be slow and measured.  Markets can cope with higher rates if they are well foreseen and can be deliberately incorporated into plans.

The wild card is inflation, a new Federal Reserve Chairman, and overseas central banks.  The long missing rise in prices seemed to reappear with the January jobs report, which indicated that wages had increased nearly 3% year over year.  There’s no more important component of price stability than labor costs.

Of course, all of this is occurring against a very positive backdrop.  Synchronized global growth, still unusually low interest rates, and strong corporate earnings are not the normal backdrop for an extended period of stock weakness.  Recently passed tax cuts and potential infrastructure spending also are supportive of markets.  Nevertheless, one always must ask to what extent have these developments been priced into markets.  Recently, some economists have started to worry about the impact of this fiscal stimulus on the ability of the government to service all its debt.

Bottom line, for those with a longer-term focus, who are pursuing quality investments, this is an appropriate time to be adding to portfolios.  But, no one should assume that we have seen a floor in the stock market or make themselves overexposed to any single assumption about the future.

For nearly 25 years, Point View Wealth Management, Inc. has been working with families in Summit and beyond, providing customized portfolio management services and comprehensive financial planning, to develop and achieve their financial goals.

Click here to contact David DietzeJohn PetridesClaire TothDonna St.Amant and Elaine Phipps,  or call 908-598-1717 to learn more about Point View Wealth Management, Inc. and how we can help you and your family meet your financial objectives. To sign up for our complementary commentaries and newsletters, e-mail us at firm@ptview.com.

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