Renowned stock market expert Jeremy Siegel went on CNBC's Squawk Box to discuss the Federal Reserve's looming rate hike decision. Interestingly, he sees the possibillity that the Fed increases rates and stocks rally as a result of dovish language and lower "Dot Plot" expectations.
Economic research has time and again shown that it is really hard, if not impossible, to consistently beat the market by strategically going cash. As an investment advisor that specialzes in equities, we know this first hand.
That is why we will always stay fully invested.
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On average over time, market corrections occur roughly once every two to three years, making the extended period until last week without one unusual. Three things are important to remember during stock market panics. First, these are completely ordinary market events that serve the usual purpose of chasing less committed equity investors to the sidelines. Second, in time stocks will completely recover their lost ground, so anticipating that recovery should be our focus now. Which leads to the final important point, and that is the fact that market panics create exploitable opportunities.
The most obvious opportunity is to rebalance asset mixes back to target allocations, which means selling some stable assets and plowing those funds into temporarily depressed stocks. Another similar opportunity is to rebalance equities toward the ones with best recovery potential. The types of stocks that selloff the most during a panic are the same ones that rebound the most vigorously during recoveries. This creates a relatively brief but highly attractive trading opportunity. There are other more aggressive responses as well, but these first two opportunities should be exploited first.
Our ambition should be to come out well ahead when this stock market panic/recovery cycle completes its course.
Lowell D. Pratt Jr., CFA
Company President Lowell D. Pratt Jr., CFA shared his thoughts earlier this morning about the market correction and our next steps on the front page of our website and LinkedIn. If you would like to know what we do during market corrections in your portfolio, those posts are great resources. This post will dive into the details underpinning the correction.
1. This correction is about international conditions rather than the US economy.
Explanations for the sell-off include plunging oil prices, slowing Chinese economic growth, company earnings and the chance that the Federal Reserve will begin raising interest rates next month. It is impossible to pinpoint any one reason for the correction and it is likely that each plays some role but the data show that this is more about international weakness and its impact on U.S. company earnings than worries of a rate increase or a U.S. recession.
Through the end of last week, the sectors losing the most ground were Energy and Information Technology. With crude oil plunging below $40 a barrel and IT firms’ reliance on overseas sales – Apple, Intel, Google, Microsoft for example – it is not surprising that these two sectors have fallen the most as global markets plunge.
If this was about the Fed’s September decision about interest rates, we would expect to see opposite movements for Financials, the consumer sectors and Utilities.
2. The correction is indiscriminate.
The Peoples Bank of China caught financial markets off guard with Tuesday’s surprise announcement that it will devalue the Yuan, prompting sell-offs in stock markets across Europe and the US. Some US lawmakers condemned the move, calling into question China’s motives, that its move escalates a “currency war.” For years, China has been accused of artificially manipulating the Yuan’s value lower to make its exports more competitive but China maintains a soft peg against the US Dollar and the recent appreciation of the dollar caused the Yuan to appreciate in tow.