What’s Behind the Market Decline

What’s Behind the Market Decline

Feb 9, 2018

What’s Behind the Market Decline

Click on image above for video

By Steve Wolff

Now for the understatement of the day…volatility has returned to the stock market.

Why has the stock market gone down with such force in the last week? I think there are a few reasons.

  1. Profit taking. Stocks had run up extremely quickly over the last year or so, especially in January when the indices were up by around 8%. So it is normal for profit taking to occur.
  1. Rising interest rates. Some investors have been spooked by the rise in interest rates. The 10-year government bond has risen to around 2.9%. They also believe the Federal Reserve is going to raise rates 3 or 4 times this year. When interest rate on bonds get high enough, they are competition for money that is now in the stock market. So the people who worry about this decided to sell some of their stocks.
  1. Forced Selling. Perhaps the main reason for the stock market dive has been caused by hedge funds and others who invested in something called the VelocityShares Daily Inverse VIX Short Term Exchange Traded Note (and other securities like it). It is a security that bets on the volatility of the stock market. This is a highly leveraged security that is great when there is no volatility in the market.

Unfortunately, the spike in volatility in the market has caused some of these Exchange Traded Notes (ETNs) to nosedive by as much as 80%. Because they are leveraged, the hedge funds and other investors were losing a fortune and had to cover their margin calls. How do they raise money to cover the margin? They sell stocks that they own. This is what’s known as forced selling and it is happening in spades.

Are We in A Bear Market?

Does this indicate the start of a bear market? I don’t think so because the earnings that companies just reported were pretty good. Nothing has changed with the economy in the last week, just the price of stocks.

We might be in for a few more days of this until the forced selling abates. I do not believe this is the time to do any wholesale selling because the economy is still good. The tax cuts haven’t even started to kick in yet.

The advice from us is to sit tight, stay calm and if you have the cash be ready to gobble up some good stocks that continue to be forced lower.

As always, we are here for you, so if you have any questions, do not be afraid to contact us.

You can reach us at 760-692-5190 or Steve@WWMFinancial.com

Impeachment & Russia, Oy Vey

Impeachment & Russia, Oy Vey

May 17, 2017

Steve_Quick impeachment & 600wide

The economy is good right now.

The political scene is challenging.

Politics is causing a pullback today in the market. We might see more of a pullback over the next days or weeks. We believe that this will be temporary.

We talk a lot about behavior and investor returns. We talk a lot about how people get shaken out of markets because they get scared and then miss the next upturn. We are not nervous about the market, especially since there has been a pretty good run-up over the last year, and we do not want to make the mistake of trying to time markets.

Generally, political events do not influence markets in the long run. In the short term, yes, but not in the long run.

Will President Trump be impeached? Who knows?

Will the Russian issue ever go away? We have no clue.

Will Trump change his ways and just keep quiet while getting on with business? Probably not.

Will the Democrats stop trying to fight everything Trump does? That’s doubtful.

The more important questions as far as the stock market is concerned are things like…

Will Alphabet (Google) be the first to come out with a driverless car?

Will Amazon put more retailers out of business?

Will Starbucks solve the problem of speeding up their order line for people who use their app to order before they get to the store?

Will GE make some changes to get back on track?

We believe the stock market questions and the health of the economy are more important than the political questions when it comes to your portfolio. Again, that does not mean that in a short amount of time the markets can’t get hit by politics. It can and it does. But to make long term portfolio decisions based on that is something we believe would be a mistake.

For those in individual stocks, a pullback might mean that we trim or get out of some stocks to put the money into stronger stocks that have pulled back and given us a buying opportunity. For those in mutual funds, there might be some small asset allocation moves. But in general, this will not cause us to be market timers.

If the market pulls back and you have cash, then that would be a good opportunity to put the cash to work. If not, then just stay the course.

As always, we appreciate your confidence in us and if you have any questions, do not hesitate to call.

Sincerely,

Steve, Catherine, Scott and the Team at WWM Financial.