Be Patient!

Feb. 12, 2016 - The financial markets continue to exhibit a lot of volatility and continued downside frustration.  I know that this is a scary time for many with your investments in the stock market.  I want to reiterate to everyone….I am advocating to stand firm and don’t panic sell into the selling……be patient!   

History shows that being a patient investor yields some pretty solid rewards over time. Here are some numbers for you:

In 2000 the S&P 500 lost 9.1%.  In 2001, the S&P 500 lost 11.89%, then plummeted 22.1% in 2002. Three years of negative returns.   Patient investors who rode through the pain were rewarded with positive returns from 2003 to 2007 (28.68%, 10.88%, 4.91%, 15.79% and 5.49%)

Then, of course, the financial world collapsed in 2008. The S&P 500 fell 37% that year.

Once again, following the crash, patient investors who stayed the course were rewarded with seven years of positive returns (2009-2015). In some of those years, the gains were modest (2.11% in 2011 and 1.38% in 2015), but some years saw stunning performances (26.46% in 2009 and 32.39% in 2013).

Over this particular timespan, the S&P 500 produced a 15-year average annualized return of 5.0%, below a 90-year average annualized return of 10.02% (from 1926 to 2015).

The point being that successful investing is not about good timing, but good behavior….patience!

Following is information about other economic factors:

Oil

In general, when oil drops, it’s due to lower demand, or translated, slowing global economic conditions.  Yes, China has slowed its economy, but, in actuality right now, demand for oil is not lower.  Oil producers have been learning to produce oil more efficiently, production has currently out produced demand.  The resulting oil glut, has caused prices to drop.  Over time, production will slow a bit and come down to better match demand.  In the meantime, consumers and manufacturers and transportation providers all will greatly benefit from lower oil prices!  Translation…expect consumers to have more money to spend in the economy…expect improved profit margins in manufacturers and transportation providers and higher company profits!

U.S. Consumer Spending

U.S. consumer spending regained momentum in January as households ramped up purchases of a variety of goods, in a hopeful sign that economic growth was picking up after slowing at the end of 2015.  Consumer spending accounts for more than 2/3 of gross domestic product.

Consumer spending is being supported by a strengthening labor market, which is starting to lift wages. Still, households remain cautious about boosting spending, against the backdrop of an uncertain global economic outlook and a sustained decline in oil prices, which have sparked a broad stock market sell-off.

Debt and Stock Buy Backs

Deutche Bank in Germany announced a $5 billion debt buyback.  The translation…..they have plenty of cash reserves and believe with interest rates expected to rise because economic conditions are improving not deteriorating, buying back lower cost debt now will allow them to issue debt at higher interest rates and increase profitability in the long run.

Jamie Dimon, CEO of JP Morgan (the largest US bank) has purchased $1 million of JP Morgan stock with his own money!  Translation, known as a very shrewd CEO and investor believes the price of his company’s stock is oversold/undervalued and that over time, the stock will rise back up and he will stand to make a lot of money on his investment!

Just two examples of buying when fear is at its height!  Buying when in essence everything is on sale.  Buying when everyone else is selling has long been a successful investment strategy!

Summary

I know this continues to be a very frustrating and upsetting time to be an investor.  Everything across the board has been ‘repriced’ lower.  And as of today, Feb. 12th, there still is a great deal of uncertainty in global economic conditions, oil pricing is not stabilized and there is still a lot of volatility and weakness in the equity markets.

Again, I urge everyone not to panic and ride this out.  Be patient! 

As hard as it may be, this may turn into a great buying opportunity.  We all like buying goods and services on sale and at discounts.  Yet, the psychology of losing money in our investment accounts often precludes us from taking advantage and buying in uncertain times like this.

Honestly, I don’t know where the bottom is.  I don’t know if we are going to drop more or how by how much.  I don’t know at what point the large institutional investors (mostly the hedge funds) will decide where to stabilize prices.  At what point will investors decide prices are oversold?  At what point will stocks like Apple, Disney, GE, etc.. be considered good buying opportunities?

I know I am not an economist, but, based on economic information I keep evaluating, I am not in the camp of believing that we are heading into a recession.  I believe the US economy is still growing, albeit slowly and not contracting.  I believe the European economy is also still growing and not in contraction.  And, China is still growing, just not at the 10% rate they had been growing at.  I believe the US and international banking system is secure and capitalized well enough to withstand weaker banking conditions (loaning funds at low rates).  I believe over the long term being patient will again yield solid investment returns.

So, if you need to talk about or your review your portfolio, please do not hesitate to call me!  I will provide the best information I am able to as well as continue to encourage holding firm and being patent!

Regards, 

Richard B. Karlen, MBA, ChFC, CLU, CASL

President