Volatile Markets are Opportunities for Savvy Participants

Volatile Markets are Opportunities for Savvy Participants

Volatile Markets are Opportunities for Savvy Participants

$DIA, $SPY, $QQQ, $RUTX, $VXX

Some investors get scared when the stock market falls, but there is always the other side of that action.

When selling happens, stocks are on sale.

The recent Southside action can provide opportunities that investors have not seen for a while.

The Key is to be disciplined and calm during downturns and hold to your long-term investment plan. Further, it is important to keep your head during big runs North too.

As of Tuesday, the S&P 500 had fallen about 8% from its all-time high in September. This Fall downturn created fears for retail investors, as Wall Street intended.

The market rallied in November and early December, only to test the trendline again.

That sent retail participants looking for answer these Key questions, as follows:

  1. What caused the fall?
  2. Will the downturn continue?
  3. What should I do now?

When the stock market declines, investors usually blame rising interest rates, but that is just a small part of it.

Initially, some market observers blamed a rise in interest rates because they fear that rates are rising too fast, making debt more expensive for businesses and consumers. Plus, there is has been lots of talk this week about a portion of the yield curve becoming inverted. This happens when longer-term interest rates are lower than shorter-term rates, inversion sometimes precede a recession.

But, interest rates have not changed much at all during this frame of market volatility, and the yield on 10-yr US T-Notes and Bonds has declined since the stock market marked all time highs in September.

So, there are many other factors that could have caused to retest Monday.

Some participants are worried about the trade dispute between the US and China. But, it is clearly in both sides’ interest to work out a Real Deal.

President Trump has all of the leverage, so expect the deal to get done his way.

Other participants worry that US economic growth and corporate earnings growth have reached their peak. Professionals know that stock prices build in investor assumptions, and some of these assumptions may have been too optimistic, especially for high-flying technology stocks such as the FAANGs: Facebook, Amazon and Netflix. When investor assumptions about a company’s long-term growth prospects change, the sentiment can bring on a sell off.

Slowing economic growth in China, the world’s 2nd-largest economy, is fueling concerns. Italy faces a budget crisis. Europe is nearing the end of Quantitative Easing, and the BREXIT process a major source of uncertainty for global participants.

The Big Q: Will the correction will continue?

The Big A: No one can honestly answer, because no one knows. As it is impossible to say for sure when, how long or how severely stocks might decline. This downturn could continue, or stock prices could quickly rebound. There might be a period where prices are largely unchanged. Nothing in investing is guaranteed, now or ever. But our call here at HeffX-LTN is North.

There are Key truths all participants should focus on, and tune out the Noise.

  1. Stock markets go up and down. After years of almost uninterrupted gains, more volatility may represent a return to normal conditions.
  2. We have not seen a Bear market, a stock market decline of 22% or more in almost 10 years. The last correction, a decline of 10% or more was in Y 2016.
  3. Since 9 March 2009, the S&P 500 has 4X’s without accounting for dividends.
  4. Stocks are supposed to be somewhat volatile, not appreciate month after month, year after year, with no dips along the way.
  5. Cycles are a normal part of investing.

Now by most measures, the US economy is very strong overall. The Commerce Department reported that the economy grew 3.5% in Q-3, a strong showing in both historical and global contexts.

Unemployment is at the lowest mark since Y 1969, and US consumer confidence is at 18-year highs.

Though no economy can expand forever, but the Key fundamentals underpinning the stock market are sound and unlikely to fade overnight.

With all of the above in mind, participants/investors should view this market as an opportunity, not a time to jump out of windows, after all the numbers may be high, but the percentages are very small.

Percentages are Key.

It is very important to know and understand your investments and realistically assess your risk tolerance. You should stick to your long-term financial plan and resist the urge to join the herd or try to time the market, that is a game for fools.

Never act in haste, plan your work and work your plan.

There are reasonable actions you can take to make the most of a stock market decline, and rebalance your portfolio in order to keep your asset allocation on track, act like a professional.

For instance, you may be under-weighted in small US stocks. Exiting big caps and adding small, mini or micros with long term potential. Because if you have a long time outlook, a downturn can help your portfolio overall, that is if you do not panic and lock in your losses by selling when markets are down, check out the Prudent Man theory.

A downturn may also be a smart time to consider tax-loss selling, meaning, it you hold securities that have lost value in a taxable account, selling to realize capital losses and then investing the proceeds in similar securities can reduce your tax bill.

We do not know exactly what is next for the stock market on a day to day basis, but for participants with a well-designed, long-term investment plan in place, a downturn offers a time to adjust portfolios strategically for the future, we do not see a US recession for 6 to 8 years, there are trillions of dollars on the sidelines and stocks are the preferred place for the money.

Remember it is your money and your responsibility

Stay tuned…

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Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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