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A New Normal?

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What is normal? 

It seems like the markets are always moving from one crisis to the next and trying to define the “new normal”.  Perhaps we can blame the media for promoting drama in attempts to attract viewers.  That may occasionally be true but no doubt that legitimate societal stresses are commonplace: wars, high profile corporate or even municipal bankruptcies, terrorist attacks, and natural disasters are just a few reoccurring events or conditions.  AND YET…markets have historically rallied back to eventually make new highs.

There are numerous examples on the internet of historical charts showing notable world events and the market’s reaction in price and duration. 

TradingView is the source of this chart, originally published 7/4/21 and is one of the more extensive compilations I have seen.

Updating for recent price action (but using the S&P 500 Index), note the significant influences to the recent decline in the chart below.

Created with TradeStation. © TradeStation Technologies, Inc. All rights reserved

The objective or bottom line of most articles, blogs, news stories, charts, etcetera that tie negative news to the stock market tends to be a message that investors should be calm and have hope, with a focus on a brighter future.  That advice has been correct for 100% of all pullbacks, corrections and bear markets since stocks began trading under the Buttonwood tree in lower Manhattan, and up through early January of this year.  That advice may be oversimplistic as the devil may be in the details.

The Fluidity of Indexes

Historical charts of indexes should be viewed with a grain of salt in that indexes periodically change components and weightings.  For example:

  • The Dow Jones Industrial Average has removed/added members 57 times since 1896.
  • The S&P 500 Index is rebalanced on a quarterly basis.

A committee establishes criteria and companies are added and subtracted.  This is a common practice for indexes.  Therefore, index charts most often are strung together performances of individual stock constituents held at that time.  The all-time highs made in early January by the S&P 500 Index and the Dow Jones Industrial Average were not set by the same stocks within the indexes during the bear market of 2008.  Investors that were holders in those particular stocks during the 2008 bear could have been given hope that the indexes should come back eventually.  Well – the indexes did but perhaps not with the down and out names held by some investors.  Is that idea a pitch for indexing, as in, should investors focus on just owning index investments?  No, not necessarily. There is a difference, however, between blind faith in a generalized market recovery in futures versus what companies may participate or be left out.

Let’s shift focus to why.

Again, through January of this year, all negative market periods over the last 100+ years have “recovered”.  This view is based on understanding and embracing the foundational economic principle that supports capitalism or at least market driven economies – profit motive.  Companies are often started by determined individuals, betting on themselves, looking to enrich their lives which often aligns with the betterment of other lives as well.  A lack of product demand and/or a lack of profit will eventually lead to a company’s failure.  In the context of this discussion, investors can choose to be a part of a company’s success or failure through stock ownership.  There is an individual and corporate drive to succeed in a free market system. 

Success is often determined on how a company responds to challenges and crisis.  New challenges come with each crisis.  New solutions are found and assumed to be rewarded.  At the onset of the pandemic, the equity markets fell sharply as questions were brought up regarding how the economy would be affected.  Generally speaking, the market then moved higher as answers came to light.  Again, some companies have not come back but many have and have done so transformed as evolved versions of themselves.        

Now that we have covered topics of optimism, warning, and back to optimism, let’s return to warning. 

The duration and depth of crisis have never been consistent.  Exhibiting faith in an eventual recovery is one thing, but it should not be blind faith as the pain of the crisis is endured.  Active management of investments, adjusting portfolios to changes in risk is not in opposition to the idea of market recovery.  The two can be symbiotic.    

As investors, we should not be expecting the market to settle into a “new normal”.  It will never come if defined as an extended period of a “lack of concerns”.  We must accept that “normal” is a constant pursuit of new innovations and ideas and we can participate by way of the markets while dodging and parrying the dangers.

At Spectrum Financial, we continue to pursue risk adjusted opportunities that the market presents and manage life altering risk for our clients. 

March Madness is Here!

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It’s that wonderful time of year again. The NCAA Basketball Tournament is upon us. The seeds are set and the madness is ready to begin. One team will win six straight games against the best teams in the country. Teams are seeded 1-16 in four regional brackets based on their end of season rank. Gonzaga, Baylor, Kansas and Arizona are the top seeds this year.

Since the tournament was expanded to 64 teams, a 1,2 or 3 seed has won the Championship 30 of the last 32 years. That is almost a 94% chance that one of the top 12 teams will win the whole thing! Only Connecticut in 2014 (a 7 seed) and Arizona in 1997 (a 4 seed) have blemished this amazing run of top seeds. Why do the other 52 teams even show up?

They show up because, even though the champion is usually a top 12 team, the other 11 best teams lose somewhere along the way. The first two rounds of the tournament are the most exciting. There are ALWAYS a few major upsets, one of the reasons it is called March Madness. I’ll be rooting for the #2 seed Duke Blue Devils, as this is coach K’s last tournament before he retires.

The basketball tournament every March isn’t the only exciting thing this time of year. The stock market, both this year as well as years in the past, can be filled with madness in March. The stock and bond markets have experienced negative returns across the board this year, with no end in sight. At the time of this writing, the Russia-Ukraine crisis has pushed the price of oil futures to over $130/barrel, twice the price they were just a year ago. Consumers are feeling it at the gas pump as many states now seeing $4-5/gallon prices. Wheat futures have risen over 40% this year alone. I paid $3.49 for a loaf of bread last week that was $1.99 six months ago.

In March 2000, the S&P 500 hit new multi-year highs. That was the top as the market rolled into multi-year bear market. That bear market ended in March 2003, which started a steady 4+ year bull market. The 2008 bear market ended in March 2009 as the market finally found a bottom after a vicious 16+ month slide that saw major stock indices fall over 50%. As recently as March of 2020 we all remember how the market went into a freefall as COVID became a quick reality and oil drillers couldn’t give oil away.

We are seeing market volatility this March that we haven’t seen in thirty years. The market ups and downs can drive you mad if you are watching your investments every day or if you don’t have risk management as part of your investment strategy. At Spectrum our clients let us manage the day-to-day volatility of the markets in their portfolios so they can do other things. We want you to spend your free time watching some exciting basketball this time of year. Relax with family, go on a vacation, go see a movie, sleep well at night.

We have been managing client investment portfolios for over 30 years, through all sorts of March madness. Let us take some of the madness out of your buy and hold investment portfolio. Our clients use various actively managed mutual funds based on their individual risk profile. Call us today at 1-888-463-7600 and speak with our Investor Services team about what makes us different from other advisors.

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