Mid-October Newsletter

Mid-October Newsletter

by Timothy Guthrie on Oct 17, 2018



Market Update

Concerning the recent market declines, on October 4th and 5th the equity (stock) markets fell a little less than 3% (please note that throughout this newsletter I am speaking broadly and generally for sake of readability). The volume, the quantity of shares traded, was low. Considering the excellent August and September we enjoyed (producing most the gains for the year in some sectors) the decline did not look significant. The 8th and 9th saw the S&P 500 and Nasdaq tread water. At this point the downward move looked over, resulting in reversing some of the gains from September. 

On the 10th of October, the markets declined and with volume building throughout the day. this was the ugly day. I did not sell out. I had made some more conservative moves in September and early October, but these moves were not substantial. Thursday the 11th it looked like things might have bottomed out, but late in the day the selling continued. 

Friday, the 12th the markets did bounce back. The S&P gained 1.4% and the Nasdaq gained 2.3%. This helped a log, gaining back on average 15% of the market declines since the 4th. 

Why did I not sell? First let me define ‘selling out’. In February of this year I “sold out”. The market was going down and volume was high, and breadth was wide. It was clear to me. This does not mean I sold everything or all stock holdings or stock products. I sold our riskier ETFs, mostly tech and medical stocks. I did not sell our mutual funds. We own some excellent mutual funds and as I have described in the past that I prefer to let those excellent managers work the entire market cycle. So, for most of us, selling to reduce risk looks like selling one third to half our stocks or stock products. I didn’t sell this time for many reasons: 

  • I see the economy as very strong and healthy, supporting additional stock gains. 
  • Earnings season, when companies publish their results is starting and good corporate results could really push the marker higher again and erase these losses. 
  • Selling can create other problems. If you sell out, you need to get out early. Selling after the market has declined is often a bad idea. The main problem is this: when do we get back in? you can lose by sitting on the sidelines as the market recovers and we wait on trying to time getting back in, sometimes buying back in at a higher price than when we sold just days earlier. Losing 3% of the gains on the way back up is the same as losing 3% on the way down. 
  • Historically, on average, the market declines 7.5% every six months, and recovers fully, moving on to new gains in the future. 
  • Stocks can advance while interest rates rise, when the economy is strong. 

As this market decline unfolded, the sectors that performed best so far this year, got hit the hardest. This means tech, and its’ various sub sectors, and mid cap stocks. The mid cap stock fund I use is the Eventide Gilead Fund, and it was up 17% ytd at the end of September. It has also been a top 1% mid cap stock fund, measured over some time periods, but now our gains are in the closer to 7%. Robotics did poorly. I believe the reason is that many of these stocks are Japanese or German companies and those markets were more volatile than our own recently. Our medical holdings fell but are still up nicely for the year (IHI, the iShares Medical Device fund is till up 19% for the year), and I continue to believe this is a great sector to invest in long term. Other holdings had market like declines or held up somewhat better. Our fixed income holdings have done very well, positioned well for the danger (to bonds) of rising rates and providing some defense. I will continue to evaluate what we are invested in moving forward. 

Why did the market fall? The consensus is rising rates, and concerns relating to the Federal Reserve raising rates too fast (the Fed has done this before). Rates did jump in early October, but are down 1/6 of percent since October 5th, the bond market can have drama too. I have avoided traditional bonds for nearly 3 years as they can lose value when rates rise, and this has helped our results. Rates were so low, I saw the only reasonable direction for them to go was up, after falling for over 30 years from the early 1980s. 

If the fundamentals change, I will change our asset mix. Right now, I see the risk of a slowing economy as low. That does not guarantee smooth sailing, I am constantly reviewing the economy, markets, and our holdings. Political risk is also a factor now. Few neutral experts see a Democratic takeover of congress, but the House is thought to be in play. If democrats take the house but not the Senate, it does not give them the power to change policy, so I believe the real risk is more political acrimony. I am not trying to advance a political agenda here, but Trumps’ policies have been very pro-business and very good for the economy, and employment. 

Contact me with any questions about this newsletter or your accounts. Also remember that any typos are there just to prove I don’t outsource my newsletter writing. 

Other News 

I have some new content on the website. A new video about my association with the Dave Ramsey SmartVestor program and another video about the importance of working with a fiduciary (like Bullseye!). I also have some new financial planning/decision/process charts that will be posted soon. Topics include IRA deductibility, eligibility for Roth IRA contributions and If you should make a ‘backdoor’ Roth IRA contribution.