The ugly action in the market Friday, repeated in the market Monday of this week, has reinforced for short-term investors that the rallies we have intermittently been experiencing are being sold, meaning traders are taking advantage of moves higher to exit positions and de-risk their portfolios, not “press down” on market recoveries. It is difficult for us to get excited about all of this short-term noise because we preach an investment philosophy, not a market outlook. If I’m asked, “David, what do you think the market will do next week?” I’d say, “If I answer, you’ll have to fire me.” The markets seem technically broken, but that is a phrase without meaning for all but those intellectually honest enough to admit that technicals only tell you what the market just did, not what it is about to do. “Things just seem ugly …” Well, yes, yes, they do. And they may very well stay that way for the foreseeable future. So why are we calm?
First, if “calm” means “not diligent”, “not engaged”, “not in communication with our clients”, or “not in round-the-clock research mode”, then we are not calm. Our diligence and engagement right now are off the charts (no pun intended). We are calm, though, because we manage money to the goals and objectives of our clients, and we are confident that neither this market storm, nor the lingering rains it may create, will derail our client goals and objectives. We religiously manage client liquidity (for those in need of such). Our asset allocations are vigorously designed to stay within potential volatility ranges. Our accumulators (those not in need of current income or liquidity) are benefitting from reinvested dividends at lower prices (or better yet, continued purchases via rebalances and/or new cash). The lower values are emotionally uncomfortable, even if the decrease our clients experience is a fraction of the decrease the whole market is experiencing. What is likely worse than the value deterioration in the market we have seen already this year, though, is the feeling that it is going to continue. Is it?
Our thesis is that the market needs reassurance that the dwindling of foreign exchange reserves out of China has slowed down, combined with some material improvement/firming/stabilization in the price of oil. Both of these things could take months to happen, meaning ongoing market volatility into the second half of the year. Why not go really, really cash heavy while we wait? Here’s the thing: We don’t know if some Saudi/OPEC surprise announcement may come next week that rips the face off of oil shorts. We don’t know if the China capital outflows drop from $100 billion this month to $20 billion next month, rallying markets leaps and bounds (like what happened going into October). Notice what we said, and what we didn’t say: We are not predicting that these things will happen imminently; we are just cautious about being unprepared if they do. Our allocations are already constructed to withstand market volatility; they are not designed to withstand missed material movements to the upside.
“But isn’t it obvious things are going lower?” No, it isn’t. Maybe they will. Maybe they won’t. But the VIX has blown out to 30, and the yield on a 10-year treasury bond is presently .65% less than it is for the S&P 500 dividends. Sorry, but these two data points suggest that nothing is obvious, and as a contrarian, they may say something quite different altogether.
If we were betting people we would tell you what we think the short-term movement of the market will be. But we are not betting people, we are investors. And as investors, evaluating and pricing risk/reward trade-offs each and every day, we remain firmly committed to diligent, plan-based, goals-based asset allocation. We are staying calm and we are staying diligent. You pay for both of those things from us, and one never needs to be sacrificed for the sake of the other.
David L. Bahnsen, CFP®, CIMA®
Chief Investment Officer
The Bahnsen Group, HighTower
The Bahnsen Group is a team of investment professionals registered with HighTower Securities, LLC, member FINRA, MSRB and SIPC & HighTower Advisors, LLC a registered investment advisor with the SEC. All securities are offered through HighTower Securities, LLC and advisory services are offered through HighTower Advisors, LLC. This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Investors may lose all of their investments. Past performance is not indicative of current or future performance and is not a guarantee. In preparing these materials, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public and internal sources. HighTower shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This document was created for informational purposes only; the opinions expressed are solely those of the author, and do not represent those of HighTower Advisors, LLC or any of its affiliates.