After a difficult day to close the week, I felt a summary post was necessary. Friday was extra difficult because interest rates rose along with declining stocks. So bonds failed to provide the diversification benefit that they have historically done over time. This is not unusual, after all anything can happen (and usually does) in the short term, especially given the fact we are probably in the mid to late cycle of this expansion.
The chart above shows the broad based declines for Friday. Stocks, both domestic and international, fell over 2% each while bonds declined over 1%. Gold “outperformed” by falling only .60%.
So what happened?
Last week Manufacturing PMI came in well below expectations and below the 50 level, which indicates contraction.
This week the Services PMI also came in well below expectations. The street was expecting 55.4 and we ended up getting 51.4. Still expanding, but disappointing.
On Thursday the European Central Bank failed to announce any new plans for additional stimulus. And Friday morning Boston Fed president Rosenberg made the case for increasing rates sooner rather than later.
In my opinion the combination of poor data and more hawkish central banks induced some profit taking. We were probably overdue for some sort of pullback seeing as the markets had essentially risen some 10% in a straight line after the “Brexit” selloff.
The chart above shows the S&P 500 is only about 3% off it’s all time highs. So we must take Friday’s selling into context. There is some potential support between 2116 and 2110 which coincides with the “Brexit” gap and prior swing highs. The most common correction during these last 7 years has been of the 5% variety, which from current all time highs projects support around 2075. Either of these spots could work but it’s possible the market could head lower too.
The key is too focus on the big picture. The above chart shows the cumulative advance -decline of the NY stock exchange. This chart has been on fire ever since the early year sell-off. This represents broad market participation on this advancement and not the picture of a market getting ready to roll over.
We couple this with earnings growth that is starting to come back and an economy that is growing well below it’s capacity but not signaling recession either. This suggests the likelihood of continued upside for equities whenever and wherever this correction concludes. The Fed could probably derail this by raising rates at far faster pace than the street anticipates. However everything they have said so far suggests they don’t plan on recreating a 1932 style policy error.
The key thing for investors is to focus on re-balancing instead of predicting. We know we will have another bear market at some point in the future and that stocks are more risky the higher they go and less risky the lower they go. So there is nothing wrong with becoming a little more conservative as stocks go higher and a little more aggressive as stocks go lower. Instead of getting spooked and scared completely out of the market, take some profits and rebalance into some of the laggards (whether it be bonds, value stocks, etc) and vice versa when the market rallies.
There is nothing wrong with accepting that we can’t fully predict every up and down and plan accordingly. What is a problem is when we get scared and sell at lows and then reverse and buy when the market is high. Do whatever it takes to avoid this, whether it be to stop watching the business news, stop looking at the accounts for awhile, or finding a capable advisor to do this for you.