The Current Picture: Concerns are expressed daily in the headlines over the usual issues: trade tensions, economic and now health & political uncertainty. With the national election less than a month away it’s not uncommon for some clients to ask us what we’re seeing; what we’re thinking and how we’re responding. Each of our clients are unique, so let me start by stressing the importance that I:
- Entertain a wider-than-usual range of possible outcomes when attempting to assess and prepare for how markets move in the near- and intermediate terms,
- Keep inventory of the most relevant factors influencing how changes may occur and the appropriate time frame(s) over which to discount (plan) for them, and
- Remain agnostic in regard to political bias.
Please refer to the number points on the chart
#1- September 30, 2016 (See point 1 located on chart above)- Feeling uneasy about the stock market (S&P500 @ 2,164) and the upcoming election on November 6, 2016, Romeo decided to reduce his equity (stock fund) holdings by ½. In this case, he reduced his fund holdings ($200,000) by $100,000, so he held $100,000 of stock funds into the election period & kept the rest in cash.
#2- On the Friday before election day, 11/4/16 (See point 2 located on chart above) the stock market (as measured by the S&P500 Index) had fallen in value, to 2,085 (a drop in the value of the S&P index of more than 3.65%). Romeo felt good about reducing his equity holdings.
#3- Feeling concerned over the turmoil immediately following the election, and seeing higher levels of market volatility, Romeo was convinced the market would deteriorate further. The market went up at such a quick rate (See point 3 located on chart above)that he decided to wait for a pullback to get his 401k money back into the market.
From the time when Romeo sold 1/2 his stock fund holdings, to the point where the market bottomed out- lasted about 35 days. Counting the date of the market bottom, to the point where Romeo re-invested his stock fund dollars (12/12/16), was 38 days. And the value of the S&P500 Index was 2,264.
THE RESULT: Trading on Romeo’s innate instinct—deciding to sell out of ½ his then current holdings—with the intention to get back into the market later, left him with fewer dollars than if he had taken no action at all.