By Brian Nelson, CFA
To me, daily stock market commentary doesn’t make a lot of sense. We all know that the stock market is going to go up on certain days and go down on certain days. This isn’t newsworthy, per se. I think the real news would be if the market did not change during the trading session at all. Then something would be terribly wrong. I believe that accepting the inevitable concept of daily volatility allows one to accept big down days like what happened today (see chart to right) as simple normal occurrences in the market. What I try to do as head of equity research at Valuentum is to position our members with the knowledge to anticipate what might happen in the next months to years. Talking about what the market did after the fact has little value to anyone but those that would like a recap of the news.
I had outlined our views earlier last month on where I thought the market was headed next, and I think it makes sense to reiterate those views today: almost everything points to a return to 1670 on the S&P 500 by the end of 2014. Importantly, however, while we think the market is likely to recede in coming periods (at the end of 2014 is a somewhat arbitrary time horizon), we’re still participating in it. The future will always be unpredictable, and the only thing I know for sure is that my market call (outlook) and those of others will be imprecise. Nobody, and I repeat, nobody can predict where the market is going with absolute precision. If they say they can or if you take their market view as anything more than directional, you’re reading into something that is just not practical.
However, we’re not investing to be precise. We’re investing to achieve goals. So, while I think the market will face pressure, we’re still actively involved in the portfolios, even though we have a slight bent toward conservatism (based on the portfolios’ cash positions). I don’t think there’s anything wrong with that, especially as we seek to achieve outperformance in those portfolios. To me, this is the correct way to think about things given where we are with respect to 1) overall market valuations relative to historical averages (particularly the forward price-to-earnings ratio), 2) how far we are into the current economic recovery, 3) headline geopolitical risks (Ukraine) and those inherent to economic growth in China, and 4) where interest rates are headed (the discount rate we use in the valuation models).
The Valuentum process has allowed the Dividend Growth portfolio to more than double its annualized goals (by letting winners run), while the Best Ideas portfolio has been able to keep pace with the overall market recently, despite firing on only 3 of 4 cylinders (it has a 25% cash position). The Best Ideas portfolio is exceeding its benchmark by more than 25 percentage points since inception. The risk-adjusted performance is simply fantastic. Said differently, the Best Ideas portfolio is doing as well with far less capital (risk) exposed to the market as others that are taking on much more risk. This is great. The 20 or so ideas in the Best Ideas portfolio and the 15 or so ideas in the Dividend Growth portfolio are the cream of the crop. But the markets are volatile – stocks go up and stocks go down. The important goalpost is that our outperformance hit rate is fantastic and that our members do well.
What I preach most about, however, is patience and perspective. I think that these are the two most important concepts that anyone managing their own portfolios should have. If you’re truly worried about what will happen tomorrow or this week, you need to have more patience. And if you’re worried that a stock dropped a mere 10% since you purchased it, but its fundamentals haven’t changed one bit, you need to keep things in perspective. I wrote a long-winded article about how patience and perspective helped many of our members do incredibly well with Google (GOOG) – see that article here. I think that, in this market today (especially in today’s market), your expectations should be that if you purchase a stock, you should expect it to fall at least 5-10% before it recovers. This is just the correct way to position your mentality with any investment opportunity. If it doesn’t fall, that’s great. But if you think you’re going to hit the exact bottom with your entry point, it just doesn’t happen that frequently. Knowing this will help you avoid selling really great investment opportunities (like in the Google example) right before they do what you expect them to do – go higher.
With that said, here are the bullet points that rocked the market today (source):
- Stocks took a pounding, driven by worries about China’s slowing economy and rising tensions in Ukraine, sending the Dow, S&P and Nasdaq to their biggest one-day drops since Feb. 3.
- A report that Russian forces were mobilizing military forces near the Ukrainian border appeared to trigger the downhill slide in the averages, which already were giving back early gains.
- China reported data overnight that indicated a slowdown in the pace of its economic growth, and a report today said increasing concerns about the financial health of bloated industries have caused Chinese banks to cut lending by as much as 20%.
- Markets also may have been unnerved by comments from Stanley Fischer, Pres. Obama’s choice for the no. 2 post at the Fed, that the central bank is doing all it can to help the economy, even as it slows down its asset purchases.
- Techs and industrials took the worst shellacking, while utility stocks were the only S&P sector to post gains.
- Treasury prices surged amid the risk-averse atmosphere, with the 10-year yield falling 8 bps to 2.647% despite rising in morning trade.
We’re not panicking. We’re not running for cover. You know our views about where we think the market is going. We’re expecting it to fall. But as we say that, we’re actively looking for new ideas to grow the outperformance gap in the Best Ideas portfolio and to find those dividend growth gems to bolster income expansion in the Dividend Growth portfolio. One such idea that fits the mold is General Electric (GE), a constituent of both actively-managed portfolios. With patience and perspective in mind, I’d like to direct you to our write up on the industrial conglomerate:
General Electric Is in the Bargain Bin; CEO Jeff Immelt Agrees
Stay tuned!
Related ETFs: SPY, FXI, RSX