The Daily Difference: Maintain Perspective

“The key to making money in stocks is not to get scared out of them.” ~Peter Lynch Stock market abstract backgroundHopefully we are not filling up your inbox with meaningless market commentary, but at times like these we believe it is important to inform our clients as to what we are seeing and what, if anything, should be done in response. Today, the Dow had a memorable day dropping 1000+ points right at the open, only to rally back to near flat before falling again to close down 588 points. The Dow has now fallen some 1,300 points in 3 days or roughly 7.4%, a very significant 3 day drop by any standards. The equity selling in the U.S. has followed declines in Asia and Europe as the fear of slowing economies has combined with a commodity price collapse. Over the past few days we have also seen the U.S. Dollar fall against the Euro and the Yen as investors begin to doubt the Federal Reserve’s ability to raise rates in the current climate. The currency moves have had a piling on effect of sorts. How serious is this selloff and are we near a bottom?  The selloff has been serious by any standard, and it is very difficult to answer the second question, but we continue to believe that this is a long overdue market correction, not the beginning of something more serious. We are seeing many indicators that tell us we are closer to the end of this correction/pullback than the beginning. For example:

  • VIX Spike – The VIX (or the “fear index”) spiked up massively today. The VIX traded over 50 this morning, a level which is commensurate with extreme investor panic in the markets, and also indicative of significant bottoms.
  • Institutional Buying – We saw strong institutional buying early this morning at the peak of the selloff in some of the high quality names like Apple, Google, and many others.
  • Calm Bond Market – Generally this type of equity market downturn would have investors fleeing to safety and pushing prices substantially higher in the bond markets, specifically U.S. Treasuries. This has not been the case so far. Prices have inched up over the last few weeks, but the volatility in the equity markets is not translating to the bond markets.

So what should one be doing now?

  • We continue to believe that this is a long overdue correction and are using days like today to put some cash to work and re-balance portfolios.
  • We understand these moves are incredibly unnerving, yet we caution against letting emotions or panic drive bad decision making.
  • Maintaining perspective and a longer term view will benefit investors.