Yesterday, I offered suggestions on how an individual investor can profit or protect themselves from the current market mania.
For a follow-up, I asked a group of experts to offer their best strategies for how to handle, and succeed in, these volatile markets and share what they think caused this rocky month for stocks.
I asked these questions to the following people:
- Levi Sanchez: Co-Founder & Financial Planner at Millennial Wealth in Seattle, Washington
- Tony Roth, Chief Investment Officer at Wilmington Trust in Wilmington, Delaware
- Sameer Samana, Global Equity & Technical Strategist at Wells Fargo Investment Institute in St. Louis, Missouri
- Ryan Fisher, President at White Coat Wealth Management in Fort Wayne, Indiana
- Robert Johnson, Ph.D., Professor of Finance at Creighton University in Omaha, Nebraska
- Michael Tanney, Co-Founder & Managing Director of Wanderlust Wealth Management in New York City
- David Bickerton, President at MDH Investment Management in East Liverpool, Ohio
What’s causing all this market craziness?
Levi Sanchez: While it’s hard to pinpoint directly what causes short-term market volatility, it’s likely attributed to a combination of rising interest rates, uncertainty with global trade and tariffs, and negative headlines throughout the media. Corrections or decreases of 10% or more from market highs are a normal occurrence for markets on an annual basis. It’s how we react to these corrections that determine our long-term success as investors.
Tony Roth: Strong U.S. economic data led Federal Reserve Chair Powell to comment on the long way the Fed has to go in raising rates before they will hit neutral (the rate estimated to neither stimulate nor restrict the economy). This sent the 10-year Treasury yield above 3.2%, the highest level since 2011. Higher rates elevated concerns about the negative impact on equities, both from the perspective of rising borrowing costs, as well as competition from bonds offering more income.
Trade concerns and slowing growth in China are also weighing on investor sentiment globally. We agree that U.S. companies are not immune to repercussions from tariffs, and there is anecdotal evidence that some smaller companies are feeling the impact of higher input costs. But in our view, the market has swung from one extreme to the other and is now extending what is arguably a healthy, normal, well-telegraphed moderation in Chinese growth to all areas of the equity market.
Pressures are exacerbated by indices hitting technical levels (like 50- or 200-day moving averages) and the subsequent selling by short-term traders, algorithmic trading strategies, and passive vehicles.
Sameer Samana: The decline has been driven by a myriad of domestic concerns, including tightening monetary policy, a drop-off in the pace of corporate earnings growth/disappointing guidance, upcoming midterm elections in the U.S. and a rise in long-term interest rates.
There are international worries as well: the potential for trade protectionism, a possible slowdown in global growth, a stand-off between the Italian government and the European Commission over a budget deficit and concerns about stability in China and the emerging markets more broadly.
Ryan Fisher: The Federal Reserve is concerned about the tight labor market. Chairman Powell says, “So the mystery really is, why, in a very tight labor market, (organizations) are not bidding up this scarce commodity of labor more.” This introduces a headwind that is not explained by traditional economic principles and is quite puzzling.
The Fed also believes it has much further to go with respect to interest rate increases. This sentiment alone can shake financial markets and drive interest rates higher. Short-term U.S. Treasuries increased roughly 10 basis points in a relatively short time frame. Investors are beginning to think earnings are near the top. With lower potential earnings, stock valuations drop. When interest rates move up sharply and unexpectedly, stocks tend to react poorly.
Robert Johnson: Rising interest rates, trade wars and the upcoming mid-term elections are all contributing factors to the increase in volatility we have witnessed in the markets. In my opinion, however, the biggest reason is that investors are anticipating the end of the extended bull market that we are in — and are essentially willing it to happen. When you look at market valuations, they aren’t out of the ordinary historically.
The current trailing 12-month S&P 500 P/E ratio stands at 21.5, markedly higher than the historical average of 15.7. But, because corporate earnings are rapidly growing, on a 12-month forward basis, the P/E ratio is a much more modest 16.7. And, with the ten-year bond selling at a yield of 3.09 percent, it is effectively selling at a P/E ratio of 32.4 times.
Investors who are pulling out of stocks selling at a forward P/E of 16.7 to go into bonds with a P/E of nearly double that — and in a rising interest rate environment — are making a curious move, in my opinion.
David Bickerton: There is a convergence of factors contributing to the recent volatility. The stock market is finally feeling competition from bonds after nearly a decade of artificially low rates. There is also some fear in the market that the Fed is moving too fast on raising rates.
The other issue impacting the market is the amount of future growth left in the economy. Earnings cannot continue to grow at double-digit increases in perpetuity and have begun to decelerate. This pullback has hit the FANG stocks particularly hard. The high flying tech stocks that led the move to the upside are now getting hit the hardest on the downside as investors rotate out of growth and into value.
How can an individual investor capitalize or protect themselves from this volatility?
Levi Sanchez: Investors who can afford to invest in the stock market with a long-term perspective should keep in mind these are great buying opportunities. We know historically through market cycles that markets do go up and these corrections are oftentimes blips in an upward trajectory.
Short-term headlines, rising interest rates, and tariffs are all sideshows to the real story, which is that U.S fundamentals and earnings are supportive of where current markets are.
Tony Roth: One of the most dangerous moves an investor can make is to cut and run out of fear. Instead, it is critical to remove emotion from the equation and rely on facts: the U.S. economy remains healthy and typical crisis indicators are not flashing red. Earnings season tends to be a grounding mechanism for volatile markets, but results are coming in a bit mixed.
Sameer Samana: Investors can take advantage by slowly adding exposure to equities, especially in our favored areas of emerging market equities, large-cap equities, and mid-cap equities in-line with recommended allocations. We also continue to view Financials and Industrials as the most favorable and Health Care and Consumer Discretionary as favorable.
Ryan Fisher: Investors can capitalize on this opportunity by reassessing if they are in the right stock to bond mix to their relative financial goals. Taking excess risk in an environment such as what we have today is usually a recipe for disaster. If you feel comfortable with your asset allocation and can ride the waves of volatility, you will benefit the most as speculators (not investors) exit these choppy markets.
Perspective is everything. Investors need to remember about years past. Not just the past 10 years but before that. The market rarely goes up in a straight line. This is perfectly normal. We have historically
seen markets that are very volatile in nature. It is the norm to have stocks move up and pull back. Having a market that continues to go up year after year in a straight line is the only abnormality here.
Robert Johnson: If you have a long-term time horizon, this too shall pass. Remember, “time in the market is more important than timing the market.”
There are tremendous costs for missing the best days in the market. From 1996 to 2016, if you missed the five best market days, your return from investing in the S&P 500 would have been 5.99% annually, compared to 8.19% if you had remained fully invested. People who try and time the market often miss the rebounds on big up days.
Michael Tanney: Ignore the noise. Whether the market drops again tomorrow or for two straight weeks, short-term gyrations don’t make a difference to your long-term investment goals. If you must succumb to some level of emotions, set stop-loss levels every time you enter a new position. I have a rule that regardless of the circumstances, I sell my position when it’s down 20%. I must wait five days before entering again, hopefully giving me enough time to confirm my belief in the investment or realize that the thesis has changed.
If the experts knew what caused the crazy swings in the market, they would be able to profit off the moves before they occurred. Anyone who claims to know, in the absence of substantial news, is playing Monday morning quarterback.
It’s always easy to explain why things occurred after they occurred, but nearly impossible to accurately predict when they will occur.
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