The Truth About The Stock Market Decline And 7 Ways You Can Take Advantage Of It
/Top Of Mind...
I have so much to say about the past two weeks that I really do not know where to begin. Let's start here: Which of the following statements sounds better to you?
"The U.S. stock market has plunged -7% in the past six days."
Or...
"Through the first six weeks of the year, the U.S. stock market is down -2%."
The second one, right? Both are factual, yet, your perception of the market will be largely framed by which facts you hear and how those facts about the market are editorialized to you. Context gets totally lost in an era where media outlets are competing for eyeballs and clicks. That does not mean that the past two weeks have been rosy. Far from it. But it also does not mean that financial armageddon is upon us, either.
Want to keep score? Stop counting points: On Monday when the major indexes fell roughly -4% apiece, here was a major headline...
The words "biggest one-day drop in history" is not only misleading, but it is factually incorrect. It was the worst day since August, 2011 when you look at the percentage change, which is the only calculation that matters. The number of points a particular index rises or falls is irrelevant because the stock market has gradually risen over its entire 100+ year history. This means that each additional point the Dow or S&P 500 rises or falls becomes less significant to whatever period you are measuring -- that day, that week, that month, etc.
The math is pretty simple. If the S&P 500 loses 100 points from a starting value of 1,500 then it has fallen -6.7%. Down the road if the S&P loses that same 100 points from a starting value of 2,500 then it has only fallen -4.0%, nearly 3% less severe of a loss. But of course you should not let facts and basic math get in the way of a good headline...
Yes, the past two weeks have been bad. But context is rarely given because, frankly, much of the financial media is lazy. My advice here would be to focus on percentages. Points are pointless.
What We Are Doing: I want to address how we are reacting to the recent market decline before sharing some options for you to consider.
Most client accounts carry a cash balance somewhere between 20% and 40%. These are funds we obviously want to reinvest, but given current conditions we are being patient. I said last week that the long-term stock market uptrend was not broken based on one week of activity. That uptrend is in more jeopardy now that the S&P encored with a -5% loss this past week.
We would like to invest the cash available into bonds, but the bond market has been in decline too (which is something I warned about a few weeks ago). The scenario that most concerned me after last week was one in which stocks continued to fall and interest rates spiked, meaning bond values fall too. Because that is exactly what has happened, patience is more important than rushing to try and pick when we think bond prices will bottom. Ideally it would be great if bond values were rising right now, as they often do when stocks fall. But they aren't. So cash is king for the moment.
What You Can Do: Here are 7 ways you can take the lemons the market has given you and make lemonade...
- If you have been sitting on cash because you wanted the market to dip before investing, is this what you have been waiting for? If not, how much further would it have to fall before you put new money to work? Whatever you do, do not freeze. If this sounds like you, be ready to act. You wanted the ball. You got the ball. You are wide open. Will you shoot?
- Along those lines, I read a terrific idea from industry adviser/pundit Josh Brown, who proposed something on his "Reformed Broker" blog. When market losses like this occur, pick a handful of blue-chip stocks that you think are great long-term investments to own. Pick a price that is well below whatever each one is currently at. Then, in your brokerage account (or IRA), set a limit order to buy them at those bargain prices you've identified. The bad news if those prices are eventually reached is that it likely means the overall market has tumbled even further from where it sits today. But the good news is that it means you likely acquired those shares at what could end up being massive discounts in the long run. Call it a potential hedge in the grand scheme of things.
- If your financial situation has improved and/or you are willing to take on more investment risk, call me. We can look at using the cash currently sitting in your account to purchase stock funds rather than bond funds when the time comes to reinvest. The idea being that stocks rally stronger than bonds do when both asset classes eventually rebound. Additionally, if you want to do my #2 suggestion above but do not have the desire to set up a brokerage account on your own, we can help you with this process of investing new funds. After all, it is what we do.
- Increase your 401k contributions. This year you can contribute up to $18,500 if you are under age 50 and $24,500 if age 50 or older. If the percentage you are deferring comes up short of those limits, consider increasing it.
- Make a lump-sum IRA contribution. You can contribute up to $5,500 for 2017 ($6,500 if age 50 or older), if done by April 17th. You can contribute the same amounts again for 2018. Just make sure you meet the requirements. I can easily help you figure out whether you qualify for a 2017 contribution.
- If you invest in a 529 college savings plan consider making a lump-sum contribution, particularly if your child or grandchild is not close to going to college.
- If none of these six ideas appeal to you despite having the cash or budget to do them, okay, fine... Increase your mortgage payment or other debt payments. Get those paid down quicker, especially if the interest rate associated with the loan is variable and subject to increase in the future. If what I have been saying about long-term interest rates continues to materialize, your loan could become more expensive to finance in the future.
If you have questions on any of the above, call me. More on the state of the market below.
In The Market...
The S&P 500 fell -5.0% this past week. Here is how the individual sectors performed:
(price data via stockcharts.com)
Another week of red across the board. Every sector was negative, and as mentioned above, the S&P index is now slightly negative year-to-date (down -2.0%). The bond market continued its slide lower as well, as long-term interest rates climbed higher and remain at highs not seen since late-2013.
The S&P 500 did something it had not done since Oct. 2016, which is fall below its 200-day moving average price. The 200-day moving average is one of the pillars of our investment process. It is the best reflection of the long-term trend of the market.
We look for two things in regards to the 200-day moving average. 1) We want the price of any given investment to be above its 200-day average price; and 2) We would like the slope of the 200-day moving average itself to be rising over time. When both of these conditions are met, that is most ideal. Take a look at the current price of the S&P relative to its 200-day moving average (the pink line):
(created in stockcharts.com)
Also shown on here is a trend line that I believe is relevant (the blue, dashed line). The price of the S&P index closed this past week just above both this trend line and its 200-day moving average. That is crucial if the bleeding is going to stop.
If we take the same chart but blow up the timeframe from an 18-month view to a 3-year view, you will notice how the slope of the 200-day moving average (pink line) started rising back in June 2016. It is no coincidence that it was right around that time when I became bullish on the stock market again. You will also notice that by that time, the price of the S&P 500 had already been above the 200-day moving average for nearly three months. Here it is:
(created in stockcharts.com)
The positive view: Once both those conditions were met (the price climbed above a rising 200-day moving average) it was lift-off for the U.S. market. I would contend that the S&P 500 now having fallen to its 200-day moving average could set off a new rally as well. It is one of the primary points that we consider to be "price support", where the price can get buoyed and then begin to rise from there. So far that has been the case, as the S&P touched down to the 200-day moving average on Friday before bouncing higher to end the week.
The negative view: If the S&P 500 falls below its 200-day moving average, market conditions will become more problematic. Conditions are likely to be choppy for the foreseeable future anyway, but the risk-of-loss increases significantly if stock prices collectively break below their long-term moving average. Why? Because it would reflect that the collection of 500 companies that comprise the S&P, thus comprising the broad market. are moving lower in unison. And, because the 200-day moving average is a popular metric among professional investors, it would likely trigger more selling activity if the price does in fact break below it.
The bottom line: The rising price trend remains in tact, although it is hanging on by a thread heading into next week. I still look at this as a buying opportunity, but that could change very soon.
In Our Portfolios...
In Financial Planning...
I got this reminder the other day from the Social Security Administration (SSA). At first I quickly deleted it, before restoring it from my trash folder. You would not have received this notice unless you established an account on the Social Security site, which you can do here.
If you do not have an account on the SSA site, create one (it's free). I then encourage you to check your reported wage information for accuracy. It is NOT unusual for wage information to be incorrect. Since this wage data directly impacts the amount of future Social Security benefits you will receive (if still working), it is a good idea to keep records of your income each year and crosscheck it against what the SSA has on file.
What's New With Us?
I had a great meeting with our rep at State Street, one of the primary exchange-traded fund (ETF) providers we use. State Street is one of the largest ETF providers and the creator of the first-ever exchange-traded fund, its S&P 500 index fund "SPY" that it created back in 1993. If you want more info on the funds we use, why we use them and how we select them, let me know.
I will spend most of the weekend prepping for next week and working on our house. Fun times.
Have a great weekend,
Brian E Betz, CFP®
Principal