The final week of January, and the first few days of February were brutal for stocks. The Dow finished in triple-digit losses for 4 of the 5 trading days for the week and started this week in negative territory as well.
The VIX has been up 300% in the last month, the highest rise ever (VIX measures stock market volatility). And the sell-off is not just in the U.S., but stocks are heading south globally. Is this cause for alarm? We have been predicting a correction for years, yet the market has simply absorbed any short-term setback and continued to set new highs year after year. The Trump election seemed to elevate the “animal spirits,” provided substance to actual economic expansion, and the upswing in the market simply accelerated!
But the current downturn feels more natural and tolerable, than the collapse of 2008. If it continues, it will best be described as a healthy correction in a return-to-normalcy business cycle … not the unnatural government induced collapse of the real estate market from 2008.
I. What’s driving the current market volatility?
- Computer algorithms. Algorithmic trading is always following a trend and has long served as the boogey-man of stock market volatility. In truth, most programs are designed to follow trend lines, so they can accelerate gains and losses exponentially.
- Natural correction. Because we have returned to a natural business cycle since the Trump election, market forces, as opposed to government intervention, is driving decisions on stocks.
- Deleveraging – people taking winnings off the table. Again, a natural reaction to a record-setting bull market … we normally see 3-5% corrections at the top end of a healthy bull market and this may be where we are heading.
- Inevitable – nothing goes up forever. For this reason, we agree with Stuart Varney, who said on his FOX show on Tuesday morning – “if you are nearing retirement you should be looking to move 50% of your portfolio” into safer investment vehicles.
II. Should people be worried about their portfolio?
- No, don’t over-react. But given your investment time horizon, principal protection should be your highest priority right now. We have ended government intervention into the marketplace. This bull run started with: (A) QE; (B) Money Printing; (C) Zero interest rates; and the result was below 2% growth and a doubling of our debt. This was ARTIFICIAL price appreciation. To repeat the good advice of Stuart Varney – 50% of your money should now be in a safe product.
- Trump bump is fundamentals-based. Market technicals are fundamentally sound; wage growth is increasing; traditional GDP numbers are above 3% and rising. If this is a correction, you should move quickly to avoid the downside bottom. If it’s not, your money should still be in a safe investment vehicle that still has market growth participation for when the correction does come.
- The market is now operating on traditional free-market signals. Free market business activity … wage growth … fear of inflation … this represents a healthy correction and not unexpected volatility. In most cases, people are just taking their winnings off the table. You should only be worrying if you are not taking steps to protect those gains.
You know, hindsight makes many a genius:
In hindsight, the 2008 banking collapse seems obvious:
- Awful government policy
- Awful government intervention into real estate markets
- Foreclosures throughout Florida and Arizona in 2006
- Recession Fall 2007
- Bear Stearns goes down January 08
- Government seizes Fannie and Freddie in Summer 08
But instead of enacting bad policy, and fixing the problems with bad policy, as we did in 2009-2017, we are now in the early stages of unwinding all of the bad policy. Traditional market signals – GDP growth + wage growth = inflationary pressure will cause markets to react. This is not bad, it is a healthy, functioning free market.
One of the ways to limit the heartburn over the wild market swings of the last two weeks is to move some of that portfolio where it should have been in the first place – in a principal protected product. Call Now! 877-912-1919