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.
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.
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.
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
Since 1986, when I started as a financial advisor, I have heard many people say they don’t really need an advisor, or they don’t think the money they might pay an advisor is worth the cost.
Well one of the reasons we believe that most people should use a financial advisor is investor performance. A good financial advisor will give guidance to people that might keep them from making those untimely mistakes that make it very hard to recover from.
Because human behavior is what it is, most people when left to their own devices, without someone to guide them, tend to make the wrong decisions at the wrong time. We have proof of that, but I’ll get to that in just a second.
Why do people make the wrong decisions at the wrong time? It’s pretty simple. They let their emotions rule their rational thought.
And there is science behind this. There is this ancient little part of your brain called the amygdala, that starts firing when you sense danger. Like how you feel when the stock market is crashing. The amygdala is saying run, it’s the saber tooth tiger all over again.
Without an advisor to tell you to stay calm, most investors head for the hills at the wrong time.
But you don’t have to take my word for it, just take a look at some of the studies. For instance, there is a study from the Morningstar company, the company that studies mutual funds, that shows that most mutual fund investors actually did far worse than the mutual funds in which they were actually invested.
Let me repeat that… most mutual fund investors actually did far worse than the mutual funds in which they were actually invested.
We have an article from Morningstar, that’s a couple of years old now, but proves the point of how investors really perform. Send us your e-mail address and we would be happy to forward it on to you.
We think with good guidance from an advisor, there is far more likelihood that you will stick with your investments and meet your financial goals.
This is just one reason why we believe most people should use a financial advisor.
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.
Ok, this is probably not news to anyone who has children, but it is darn expensive to rear them. The U.S. Department of Agriculture recently released the actual facts and figures in its “Expenditures on Children by Families, 2013” report.
How does $245,340 sound to you? That’s what it costs to raise one child. And that’s only up to the age of 18, so it does not include the cost of college and beyond.
That’s right. The report shows that a middle income family with a child born in 2013 can expect to spend about $245,340 ($304,480 adjusted for projected inflation of 2.04%) for food, housing, childcare and education, and other child rearing expenses up to age 18.
The report also indicates that the income of the parents is a defining factor in how much the child will cost. The more money the parents have the more it costs to rear the child and vice versa. Also, the area of the U.S in which you live also matters. People in the Northeast pay the most, with the West coming in second. But no matter what the income of the parents, it’s still a staggering number.
Here is a link to the report and you can see for yourself all the nuances as to how the USDA accounts for the numbers
By the way, the reports says once you have more than two children, the less it costs PER CHILD due to things such as hand me downs, sharing of toys, the purchasing of food in larger more economical ways etc., but the total cost is still more with additional children.
This report only confirms that if you are going to have children, you should prepare for the costs and start saving as early as possible.
This is especially true if you aspire to pay for your children’s college school expenditures. According to CNN Money, the cost of in state tuition at a public school such as the University of California (Berkeley) is $12,864. The total annual cost is $32,479 which includes tuition, fees, room and board and books (excluding grants or scholarships).
Tuition at a private school such as USC is around $46,298 per year (according to CNN Money), with the total cost PER YEAR of approximately $63,033.
So getting started with a 529 plan or some other savings vehicle the year in which the child is born would make a lot of sense.
The markets have returned to volatility lately. Every time the market looks like it’s headed down, we see people on TV start predicting that this is the start of a down market.
So here is how we see things right now.
First, the stock market has not had a big correction for a long time, so we all know that at some point it will correct. There are a lot of global events going on that are causing angst in the markets. Russia and Ukraine is probably the greatest of these issues, but certainly not the only issue. Israel and Hamas, Isis, Iran, Italy sinking into a recession and more are all adding to investors’ fears.
On the other hand, earnings reports have been generally pretty good. On Monday morning, August 5th, Bob Pisani of CNBC reported that of the 76% of the S&P 500 companies that have reported so far for the quarter, on average, earnings are up by about 9.7% and revenues up about 5%. Those are actually fairly decent numbers.
The bears (those who believe the market is going to go down) believe the companies’ earnings are going to slow down. The bulls (those who believe the market is going to go up) say the companies’ earnings are strong, the interest rates are still low, so stocks are the place to be.
The bears say that rising interest rates will be a competitor to dividend paying stocks so stocks will get sold off. The bulls say that if interest rates go up, then bonds will go down in price, so you want to remain in stocks.
So the pessimists and the optimists are both trying to figure out where the market should be, hence the volatility. For the year, the stock market has been hovering around the flat line, with some months good and some months bad. So there has not been a real direction one way or the other.
We have heard several prognosticators say it looks like we are heading for a growth rate of about 3% to 4% in the U.S. for the year. If that growth rate is accurate, that is normally not the underpinning of a major bear market. But that does not mean there can’t be corrections along the way.
As we have said many times, no one knows with certainty where the market is going to go. We certainly don’t know if the bulls or the bears are going to be right in the short term. So we say that now is a good time to look at your portfolio, make sure you are in the proper asset allocation, and then be sure it is something that will not cause you to panic if the market goes down by 15 or 20% (which is a normal market correction). As most of our clients have heard us say, it is panicking out of the market at the bottom that causes the most damage to investors’ returns.
If you are not sure of where you are or just want to review your account, please call us. We are always here for you.
