On Wednesday, August 19th the Dow Jones Industrial Average closed at 17,348.73. It closed Monday, August 24th at 15,872.82, a drop of 8.5% in three trading days. Today, volatility spiked with the market falling over 1,000 points early in the day, then rallying almost back to even before closing down 586.53 points or 3.56% for the day.
In my experience it NEVER pays to make an emotional investment decision, and the wild price fluctuations today, reinforce that rule. For those that pushed the panic button at the opening, positions were liquidated down 15-20% from the previous day. For those who remained steadfast, most of these same positions are down approximately 1.5% - 2.0%, quite a difference.
So where do we go from here? The fundamentals that led us to move to a relatively cautious position a few months ago largely remain in force. One, the US economy is barely growing. Two, the remainder of the world is struggling to grow as well. Three, China is facing significant economic and political challenges, with no easy fix in sight. Fourth, the FED is inclined to raise interest rates, for no other reason than it would give the FED the ability to lower interest rates to soften the next economic slowdown. The problem here is that we may be facing an economic slowdown and the FED has no room to lower rates, no bullets left in the gun, so to speak. Fifth, the trend toward more intrusive government regulation, taxation, and executive decree, is suppressing economic growth. Sixth, the federal deficit continues to grow unabated.
In our view, the 12% pull back in the market from the May high is a culmination of the market finally removing its rose colored glasses.
During emotionally driven market moves, like what we have witnessed the last three trading days, the highest quality stocks tend to hold up the best, at first. But then as emotions intensify even quality stocks start to suffer. It is at this stage that bargains can be uncovered by disciplined fundamental and valuation analysis. Think of a shopping analogy. Junk is always "on sale" while the finest items, the stuff you really want to buy, seldom is. Smart shoppers are patient and wait for the sale on items they really want to buy.
The market is no different. True quality companies are seldom "on sale." We suspect before this correction is over there will be quality stocks that we can buy at very attractive prices. Identifying these opportunities will be our primary focus in the days and weeks ahead.
Ted, David and I have been through market corrections like these many times before. In 1987, the stock market dropped about 22% in one day. It then rebounded over 200% in the next 3 years. No one has an accurate crystal ball, but history has shown repeatedly, that the market will recover. In the meantime, upgrading quality, systematically, remains a tried and true investment approach, and one which we fully embrace.
We understand these markets produce a lot of anxiety. It is precisely this anxiety that causes all the volatility. And while we feel many of the causes of this correction are still in place, we will continue to be opportunistic while remaining prudent. We appreciate the trust you have placed in us and we take that responsibility very seriously. These are the times where we hope we earn that trust. If you wish to talk about your portfolio or the markets, feel free to call any time. Thanks for your support.
© Willingdon Wealth Management
