A Note to Our Investors
By Cliff Hodge, CFA® Portfolio Manager at FinTrust Investment Advisors
“In the old legend the wise men finally boiled down the history of mortal affairs into a single phrase: ‘This too will pass.’” – Benjamin Graham
On February 5, 2018, the Dow Jones Industrial Average had its largest intraday points-based selloff in history, dropping nearly 1600 points going into the final hours of the trading day. With all the noise and headlines it’s easy for investors to get caught up in the hysteria and forget about the big picture.
Since the lows of March 2009, the S&P 500, charted above, is up 495% including dividends. That is an astonishing run, and one of the strongest and longest bull markets in history. From the peak on January 26, to the close yesterday at 2649, the S&P 500 is down 7.8%. The last time we traded at that level was
December 8, 2017. Has this selloff been painful? Yes. Should investors rush out and make drastic
changes to their portfolio? In short, the answer is no.
What we’re seeing:
In our view, the markets are transitioning from a centrally planned, interest rate driven market, to an earnings based and individual company driven market, otherwise known as “normal.” The markets have gotten used to an extremely dovish monetary backdrop, and almost decade of extremely low volatility. The uncertainty about this transition, naturally is creating volatility. While rates can be raised or lowered overnight, the impact on earnings take time, so we expect higher levels of volatility going forward. Over its life, the VIX, the primary measure of market volatility has averaged roughly 20, and is one of the more mean-reverting series we track. That’s a fancy way of saying that over time, it tends to stay fairly close to that mark. In 2017, it ended the year at 11, never got higher than 18, and put in an all time low of 8.5! Unfortunately, averages are calculated over a large number of events, thus you can have an average made up of small numbers and one really large number or a series or slightly higher and slightly lower numbers. There are many ways to get there.
While volatility has certainly been responsible for some of the shenanigans we’ve witnessed over the past few days, the investment backdrop for markets is still quite strong. The tax cuts have yet to work their way through the system in a meaningful way, and the global economy is experiencing synchronized growth for the first time in a long time. At home, 4th quarter GDP came in at 2.6%, not setting the world on fire by any means, but a solid number driven by a strong consumer. Interest rates are still low, though have risen to four-year highs over the past few weeks, and employment data is strong. US corporate balance sheets are in great shape, and the repatriation of overseas cash allows for reinvestment back in the companies to improve earnings or returning to shareholders in the form of higher dividends or share buybacks. Selloffs can be sharp, unexpected and painful, but as history teaches us, temporary. There are risks in the market. Chief among them in our book is that, spurred by inflation, the Fed gets too aggressive with tightening which pushes the economy into recession. Even if this does happen, our clients should feel comfortable because we plan for things like this.
We take a conservative approach to portfolio construction, using top-notch investment products to build diversified portfolios with the goal of managing volatility. Our goal is to keep clients on track for what is most important, so that they can be confident in us and in their plan regardless of what the markets may bring.
Cliff Hodge, CFA
FinTrust Investment Advisors
This material was prepared by FinTrust Brokerage Services, LLC (“FinTrust”) and is excluded from the definition of “research report” found in FINRA Rule 2241. This material is a market commentary and does not constitute research and is not intended to form the basis for any investment decision. Any statements regarding market or other financial information is obtained from sources which FinTrust believes to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. The information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. The material has been prepared for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss in a declining market. As with any investment strategy, there is potential for profit as well as the possibility of loss. All investments involve risk and investment recommendations will not always be profitable.
Securities offered through FinTrust Brokerage Services, LLC, member FINRA/SIPC
Advisory services offered through FinTrust Investment Advisory Services, LLC, an SEC registered investment advisor.
1. All return data from Morningstar Direct and assumes reinvestment of dividends