It was not a great week to have a baby and be an investment advisor! Luckily, the hospital had WiFi and Fox Business on the TV. I was able to welcome our family’s newest addition, Alexis Karen, on Tuesday. In addition, I sold the remaining investments in my client’s portfolios as their prices dropped below their respective 200-day EMAs. The last trades were placed on Wednesday, which means we were able to avoid the losses most of the country experienced on Thursday.
This past week saw the return of extreme volatility in all markets with triple point moves in both directions. However, the largest moves and volume was to the downside. What is fueling the selling pressure and weakness? There are a number of items. What follows is a list in the best order I can give:
- Economic weakness – With manufacturing slowing, unemployment staying above 9%, weak housing data, and much more, investors are very concerned of the recession we are now heading toward, if not in already in.
- The increase in the US debt ceiling was not a good thing and investors are starting to get the point about how far in debt the US really finds itself.
- Europe – For the last 15 months, the European powers have tried their best to get their arms around Greece, Ireland, Portugal, Spain, and Italy. Italy has been a problem, but is now finally being recognized as such. The problem is the Italian economy is likely too big to truly save. That does not mean Europe will not try to save Italy, but the cost is going to be huge and require lots of money printing in Europe. Few people know this, but the vast majority of the $600 billion in treasuries that the Fed purchased under QE2 was used to backstop European banks. I think it is safe to say that Europe is in just as big a mess as the US.
- Selling begets selling – There are many investors that drank the Kool-Aid and thought that global markets would be turning up. We know this because there are many investors investing borrowed money (margin) which is at all time highs. As well, mutual fund cash positions are at ALL TIME lows, meaning fund managers are fully invested. When a market sell-off starts and gathers speed, investors with margin have to start selling to satisfy margin calls, and fund managers have to start selling to meet redemption requests. The sinking market hit a selling trigger where selling is begetting selling. This is why we saw everything selling off this past week.
The one positive is that in the last month, gold is up 8.64% and silver is up 6.32%. Compare those numbers to the S&P 500 Index, which is down -10.47%, and the former safe haven US dollar which is down -.89%, in the last month. What we are likely seeing is a changing of the guard of safe haven status from the dollar to gold. As the globe gets scarier and more debt laden, it is hard to imagine any of the shine coming off gold, or silver for that matter.
The one very scary part of what we are seeing currently is what I have spoken of for some time, and that is the loss of safe haven in the US. In the market selling, we are not seeing large surges in the US dollar and US Treasuries. Rather, we are seeing gold and the Swiss currency gathering a lot of safe haven investment. When the markets fell apart in 2008, we did not know what we know now, nor did we have the debts and unemployment we have now. These facts alone are why I believe some sort of stimulus will be coming fairly soon. The problem is more stimulus is not going to get the economy going either. It will prop up stocks for a little while, but again not very long. Since 2000, when the dotcom blow up occurred, the government and Fed have accelerated poor economic decisions. The result has been mal-investment and too much government intervention that is sucking the life out of Americans to save large corporations who made bad investments.
Since writing the above market commentary for last week, we received news that the S&P rating company downgraded US sovereign debt for the first time in everyone reading this’ lifetime. Moreover, Germany is backing away from being the provider of bailouts to peripheral European countries like Italy. This coming week ought to be interesting as well to say the least…
Please note: I intend to touch-base with each of my clients this week to discuss their specific portfolios. If you are currently with an advisor who is subscribing to “Buy and Hold” as their strategy, please give me a call. This is unsafe and old fashioned given the new era of economic distress the global markets are in.
Do you have an investment strategy that seeks to protect your portfolio against volatile economic conditions? Call me to schedule a free review of your current investment portfolio – 913.693.7918.
John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals. For more information, visit http://www.chladekwealth.com.