Not a whole lot has changed since the last update post. The lows at 1812 on the S&P 500 has held so far and the market has retraced back into the lower of the two resistance levels that were outlined. So far the US stock market is down around 15% from its 52 week high, but it, along with the rest of the indices of the developed world, are below their 200 day moving averages. It’s a sign of caution and also signals a real possibility of some further downside to match the size of the 2011 correction (20%).
China’s stock market is down 49% from its 52 week high.
Europe is down 23%.
And Japan is down 24%.
So the US continues to outperform the rest of the developed world, but it’s not certain whether the others will continue to drag down US stocks.
Most economic indicators continue to show slow expansionary readings and financial stress indicators show below average readings. All in all the odds appear low that the US will go into recession in the near term.
Another key event happened last week as the Bank of Japan introduced a negative interest rate policy (once again). Along with this, the yield on 2 year treasury bonds have fallen precipitously so far this year. One viable interpretation is that the market participants have readjusted lower their expectations of potential future fed funds rate hikes (at least for this year). This certainly bodes well for stocks if this turns out to be true.
We must remember that market corrections are a relatively frequent event. One of the reasons why investors get the returns they do in stocks is because they can be very volatile at times. The US markets have averaged a 20% correction every three years or so, and it’s been 5 years since we have had such an occurrence.
To be a successful investor you must accept that there are certain things that are out of our control. Low probability events can happen, especially when markets are all trading below their 200 day moving averages.
Things we can control:
- Our asset allocation, defining a tolerable level of risk that you can comfortably accept.
- Position sizing, never overallocate to any one company or even any one asset class. Markets are cyclical, whatever has worked the best is destined to underperform in the future. Stocks are more risky when the go up and less risky as they go down. It goes against common perception but it’s the truth.
- Costs, funds that have high expense ratios and fail to beat the benchmark on any time frame need to be removed. Many brokers even have commision free ETF’s now for those who prefer those options. Especially for small accounts still in the accumulation phase, this can be extremely helpful.
In the end no one knows whether the lows are in already, or if not, how much lower the markets will go. Personally I believe its most likely that the markets won’t fall much farther than 20% from its 52 week high. But I also feel that the upside potential is much more limited than it was back in 2011. Investors should take a more cautious approach, now is not the time to overextend yourself on risk, but it’s also not the time to run from stocks either.