Deep breath, exhale, let it out - Alaska Permanent Capital Management


Deep breath, exhale, let it out

Jeff_PantagesIt was another rocky week for the equity markets. The S&P 500 rallied nicely on Friday to close at 1,865, but fell 0.7% over the week. It was worse in Europe as the Stoxx 50 lost 3.5%, as well as in Japan as Nikkei 225 stocks lost 9.5%. A Citigroup analyst was talking “death spirals” and MarketWatch offers that the sell-off in European bank stocks is “ominous.”

Investors piled into safe havens like U.S. bonds, gold, and the Japanese yen. It’s the same set of worries – central banks running out of ammunition (and becoming less effective at repressing market volatility), a fresh fall in oil prices to below $30, and anxiety over European banks (mainly over the fate of bank earnings in a low/negative interest rate environment).

Treasury bonds rose in price and yields fell 10 basis points (bps) to close Friday at 1.74% on the 10 year Treasury. Yields are down a whopping 53 bps since year end.

Good News: Monday is Presidents Day and the markets and APCM will be closed. Zero volatility that day, at least in the U.S.

The “correction” in the U.S. stock market is now at -12.5% based on the close Friday. It has been 267 days since the S&P 500’s all-time high on May 21, 2015. It’s the longest correction since the bull market began in March 2009.

Perhaps yoga or meditation is the best advice for investors these days. Calm down. This too will pass. Relax. Deep breath. Exhale. Let it out.  

The best thing to do during market upheavals is…nothing. Better yet, clean out your closet or garage. Go exercise. Part of the anxiety of market downdrafts is that you don’t feel in control and want to just do something. This happened to people after 9/11 too. It’s stress, so do something productive. While selling may give you short term relief, it ultimately wrecks your portfolio and long term plan/goals.

Understand that the media has a vested interest in selling newspapers or getting your eyeballs to watch TV. That’s why soaring and plunging are very popular words to use in financial headlines. I will never forget a headline on CNBC during the financial crisis in 2008. The markets were steady that day – nothing going on. “An eerie calm grips the markets” scrolled across the TV screen. Here’s a definition of eerie: strange and frightening. Synonyms include: uncanny, sinister, ghostly, unnatural, unearthly, supernatural. See what I mean? Pay attention, something bad is going to happen. Be alert and do…what? Sell? Please don’t.

History shows that we have a correction in stocks (i.e. a 10% decline or more) every 2 years or so since 1950. Since 1928, we have had 23 bear markets (i.e. a decline of 20% or more), occurring approximately every 3 ½ years. And markets have bounced back every time. The volatility is not unusual and is the price you pay for earning (and I mean earning!) higher returns. If you want stability buy Treasury bills and earn little return. That’s the tradeoff. There’s no magic formula to avoid that, despite what market timers may tell you.

I am not belittling current volatility or concerns. It worries me too. I do think it is an overreaction to sluggish – but not recessionary growth. I think falling oil prices are ultimately good news. The U.S. financial system is strong. It’s not 2008 again. Earnings have flat-lined and are certainly disappointing, but equities are reasonable value and getting cheaper! High quality bonds are expensive insurance and destined to provide meager returns. The ride is bumpy and feels even more so given the relatively smooth glide upward through last spring since the market bottomed in March 2009. The calm that preceded this current bout of market volatility was unusual. Hang in there.


Jeff Pantages, CFA®
Chief Investment Officer


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