"Black Monday" Turns 30 Years Old

In The News...

Thirty years ago, on Oct. 19th 1987, this happened:

(chart created via stockcharts.com)

Now known as "Black Monday", the S&P 500 fell -20% in one day. It remains the largest daily decline ever in the market - more than two times worse than any other day on record (for reference, the worst one-day decline during the 2008 recession was -9.0%). Following Black Monday it took roughly one year for stocks to recover those losses, also shown in the above chart.

Earnings season is here again. So far 17% of S&P 500 firms have reported third-quarter financial results. Among those 100 or so companies that have reported, profits are up +1.7% (vs. +3.0% estimate) and sales are up +5.1% (vs. +4.9% est.), according to data provider FactSet. Earnings kick into high gear this week, with many of the big boys reporting in the coming days. Google, Amazon and Microsoft all release results after-market on Thursday Oct. 26th.

Change at TD Ameritrade: Our custodian, TD Ameritrade, has revamped its commission-free ETF (fund) lineup. This brings good news, bad news and no news.

The good news is that TD has expanded its list of transaction-cost-free funds from 100 to 296. This means more investments to choose from that will cost us/you nothing to buy and sell. For context, when we buy or sell a fund (ETF) for your account that is not on this list, it is $6.95 to do so. We try to use funds from this list because it means there are zero trade costs, provided we hold the investment for the required 30-day minimum (which we most often do).

The bad news is that while TD has increased the overall number of funds to 296, it has removed certain funds from the list. This includes the S&P 500 index fund we use (IVV), along with most of the bond funds we use (AGG, LQD, JNK and TLT). We do not trade the bond funds nearly as often so in that sense it isn't a big deal. But it does mean I will need to research new, comparable commission-free bond funds and start using those instead when practical.

This is no news if you have $100,000 or more of invested, billable funds with us because we already pay for all trade costs if that is the case.

This is something I considered when deciding which custodian to choose upon leaving Scottrade. I had asked TD whether the list of commission-free funds could be reduced and the answer I got was a pretty vanilla corporate response. Honestly though, I could not expect much else. Changes happen and we roll with the punches. If this type of change were the deciding factor that kept me from choosing TD Ameritrade then our priorities were misguided when choosing a custodian. It's something we will adjust to and move forward.

In The Market...

The S&P 500 rose +0.9% this past week. Let's look under the hood:

(price data via stockcharts.com)

It was the 6th-straight weekly gain for the S&P 500 index, which has risen more than +4% over that time. The last time the S&P went seven-straight weeks? Dec. 2014. History suggests we should see a pullback here, though it may only be in the 2-3% loss range over the next few weeks. We'll most likely see the broad market flatten out over the next month or so. But seasonality still plays in the favor of the market rally continuing through December, as again, Q4 is typically the best three-month stretch of the year.

Meanwhile, bonds sold off as stocks continued to rise. Long-term interest rates look like they might be on the cusp of spiking higher, but have had a tough time doing so when they have reached this point (to be specific, whenever the 10-year Treasury bond yield has hit 2.4%). This is a tad concerning for our bond positions, but we will continue to monitor bond values with patience over the coming days and weeks before making any changes.

In Our Opinion...

Should you invest in Bitcoin?

A number of people have asked me this in recent weeks. The short answer is, I don't know. The longer answer requires researching and learning more about Bitcoin before feeling comfortable recommending it to anyone.

What is Bitcoin? Bitcoin is a digital currency, designed as an alternative form of payment to U.S. dollars or other foreign currencies. In effect, it provides a uniform currency across economies and eliminates the need for exchange rates. Bitcoin makes international buying/selling easier, but it is unregulated.

What is one Bitcoin worth? This is where it gets tricky, given its recent value surge. According to the NYSE Bitcoin Index, one year ago Bitcoin was worth roughly $600, six months ago it was worth $1,000, three months ago it was worth $4,000 and today it is worth $5,700. That is a +450% gain in just one year!

Bitcoin's rise may be the problem. Not because Bitcoin isn't "worth" $4,000 or $5,700 or whatever amount on a given market day. An investment is worth whatever buyers and sellers are willing to buy and sell for provided they have access to the same information. Bitcoin's value is a problem because it is supposed to be used as a currency and currencies should be somewhat stable. The extreme day-to-day price volatility makes it difficult to use in the exchange of goods and services, at least I would assume...

So... is it an asset or a currency? Given the increasing demand and rapid value growth, the result is that consumers buy Bitcoin as an investment and not for its original, intended use. This makes Bitcoin more of an asset and less of an actual currency, kind of like gold or other precious metals. This isn't to say that it won't become a mainstream currency, but for now it looks and smells a lot more like an investment/asset.

My biggest Bitcoin fear: When people start buying it for no other reason than they think they will get rich quick that makes it ripe for turning into a bubble. I suspect this is the case based on some of the inquiries I have gotten.

We could say the same thing about any given stock, but there is one key difference. For many investors, it is calming to be able to see the company they invest in and read things about what the company is doing. It emotionally helps validate the investment decision. Bitcoin, in comparison, is a bit of a black hole. Even if that is not truly the case, I know a few people who have blindly thrown money into Bitcoin without knowing anything about it. My fear is that the moment its value falls, investors will be quick to bail. Unlike stocks, which have lived more than a century and have a track record of rebounding from massive price declines, Bitcoin has yet to weather any real storms.

The Verdict: I need to dig a bit deeper on Bitcoin. For now I would refrain from buying it, but if you are interested let me know and we can discuss.

In Our Portfolios...

Q&A/Financial Planning...

Is it open enrollment time for benefits at your company?

If so, don't simply go through the motions with regards to your health care options and other available benefits, such as flexible spending accounts. Take the time to assess the differences between health care plan options, particularly if you anticipate any major medical expenses coming in 2018. Evaluate whether the tax-savings of the Health Savings Account (HSA) make it a worthier choice than the PPO, HMO or whatever other options are provided. We are happy to help if you have questions regarding your plan options.

What's New With Us?

I spent the weekend battling a stomach virus that I picked up from our daughter (who got it at day care), but I am all better now and ready for a great week.

Enjoy the week ahead,

Betz Signature 250px.png

Brian E Betz, CFP®