Navigating Stock Market Volatility

Navigating Stock Market Volatility.png
  • Bringing Perspective to Market Volatility

  • Negative-Yielding Bonds

  • Financial Guidance for Young Adults

  • Looking Ahead to Small Business Confidence, Retail Sales and More

After hitting record highs at the end of July, stocks dropped precipitously this past week with bursts of selling driven primarily by trade- and currency-related news and conjecture. Down 6% from their highs at Monday’s close, stocks have been rebounding but volatility remains high.

Escalating trade tensions and fears that the global economy is slipping closer to recession catalyzed a sell-off early in the week. China’s falling currency and manipulation by its central bank headlined concerns until fears of an all-out currency battle were dialed back. As we’ve said many times, hourly and daily market moves are noise—especially in a week with little new concrete data to rely on. 

For all of the doom-and-gloom headlines and increased downside market volatility, stocks are still solidly in positive, double-digit territory for the year.

For all of the doom-and-gloom headlines and increased downside market volatility, stocks are still solidly in positive, double-digit territory for the year. Through Thursday the Dow Jones Industrial Average and the broader S&P 500 have returned 14.7% and 18.6%, respectively. The MSCI EAFE index, a measure of developed international stock markets, is up 9.7%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has dropped to 2.28% from 3.28% at 2018’s end. On a total return basis, the U.S. bond market has gained a fairly remarkable 7.8% for the year.

Bringing Perspective to Market Volatility

You’ve probably heard the old saw often attributed to Mark Twain: “If you don’t like the weather in New England, just wait a few minutes.” Well, the same sentiment certainly applied to the stock markets this week, and nowhere was it more evident than on Wednesday, when the S&P 500 index fell almost 2% early on only to recover and finish the day in positive territory.

If you were following the market’s every twitch, it was an emotionally taxing trading session and it came on the heels of five consecutive down days, over which the Dow fell more than 1,500 points, or 5.5%. But if you weren’t caught up in the market’s minute-by-minute moves and just saw the closing numbers, Wednesday barely moved the needle.

The lesson is that as an investor rather than a trader, extending your time horizon by even the smallest increment can improve your mental well-being while providing a bit more perspective when prices are moving against you.

Zoom out a bit more and consider a Rip Van Winkle investor who, waking this morning from a deep slumber, sees the following report on the markets and economy: The S&P 500 is off less than 3% from its recent all-time high. Inflation, unemployment and interest rates are low. Cash and loans are readily available. Economic growth is slow but steady and data continues to point to expansion. What would Rip be seeing as he caught up on the news in his morning paper? He’d be looking at a Goldilocks economy—not too hot, not too cold.

Now, just because we’re referring to Goldilocks doesn’t make us Pollyanna. We’re not ignoring the bruising trade issues, the lack of growth overseas or the myriad political fights that beset us. It’s just to provide some investment perspective—there’s plenty of good news amid the market volatility we’ve seen lately.

Negative-Yielding Bonds

Portions of the bond market are begging a question: Does it make sense to invest in something where you are virtually guaranteed to lose money? The easy answer is “no, of course not.” But if you cast an eye overseas, you would see around $15 trillion of bonds trading with a negative yield.

Since those who invest in negative-yielding bonds aren’t actually sending interest payments back to the bonds’ issuers, how is this possible? Say you buy $100 of a bond that matures in a year and pays 1% in interest. At the end of the year, you’ll get your $100 in principal returned plus $1 in interest, making the bond “worth” $101. But in today’s crazy bond markets, some investors, mainly pension funds and banks, are paying $102 for that $100 bond, creating a negative yield and guaranteeing a loss.

We haven’t seen negative yields in the U.S., but this is precisely the situation many European investors are facing today. The reasons behind it vary; for instance, banks are required to hold a certain amount of “safe” assets to offset the loans on their books. Pension funds must match their liabilities with safe assets even if they don’t pay interest. And index funds ignore prices when replicating the indexes they are obligated to match. Add in speculators, who are betting that rates will go even further into the red, and you have all the makings of a market where already-low yields can turn negative.

According to textbooks, negative yields aren’t supposed to happen. But we don’t live in the world of academia, we invest in the markets as they are. So it’s worth understanding how supply-and-demand interactions can cause what appear to be unreasonable or downright senseless situations.

Over the past 25-plus years, we’ve been helping clients and investing alongside them through bear markets, recessions, sudden swoons and unforeseeable market shockwaves. Despite all those bumps in the road, we’ve compounded wealth by staying disciplined and keeping a long-term perspective. That’s what we plan on doing for the next 25 years, too. 

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Financial Guidance for Young Adults 

Youth may often be wasted on the young, but it doesn’t have to be. One’s twenties are a time of great opportunity—starting a career, advancing your education, living in a place of your own, perhaps meeting a life partner. This is a critical time for a young person to create good financial and investment habits upon which to build a strong foundation for the rest of their lives. 

While not all-inclusive, here are five habits to impress upon a Gen-Y child, grandchild or other loved one that can help set them on a course for financial success now and in the future:

1.  Invest Early and Often. When you start earning a paycheck, put away at least 10% of your pre-tax income toward retirement. This sounds like a lot, but keep in mind that this 10% also includes any matching funds you receive from your employer through, say, a 401(k) plan. Tap into the power of compounding by investing early and often and allowing the market to work for you.

2.  Invest for the Long Haul. You can justify riskier investments with youth on your side; there’s more time to recover from—and capitalize on—inevitable market downturns. You won’t be touching your retirement accounts for decades, so make stocks or stock funds a major component of your portfolio.  

3.  Create an Emergency Fund. Can you afford to continue paying your monthly bills if you lose your job unexpectedly? The general rule of thumb is to keep six months of household living expenses at the ready.

4.  Build Your Credit. Your credit score reflects your financial health. Creditworthiness has a big impact on how much you’ll pay for big expenses down the road: Interest rates on home and car loans and insurance premiums are often based, in part, on your credit history. Potential employers may also check your credit history for a read on your financial stability. Review your credit score and credit reports on a regular basis. We recommend adding at least one credit-monitoring app to your phone—Credit Karma, Mint and Credit Sesame each monitor your credit score and provide tips on improving it.

5.  Maximize Company Benefits. Your employer may provide a match on your 401(k) contributions or other benefits. Take advantage of savings wherever you can get them, including health savings accounts, life and disability insurance, and other perks like discounts on gym memberships or continuing education. Check with your company’s human resources department to make sure you are fully aware of all benefits available to you.

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Looking Ahead to Small Business Confidence, Retail Sales and More

Next week brings a raft of useful reads on the economy, including data on small business confidence, consumer sentiment, inflation, household balance sheets, retail sales, manufacturing, residential construction and homebuilders’ outlook on the housing market.

If you’d like to learn more about our tactical or fundamental investment strategies, please contact Steve Johnson at 844-587-7393 or info@bravercapital.com.

Please note: This update was prepared on Friday, August 9, 2019, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations or personal investment advice, or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. We do not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be seen as a recommendation to buy, sell or hold any of them.

© 2019 Braver Capital Management, an Adviser Investments, LLC company. All Rights Reserved.