Downside Pain vs. Upside Gain

We are wrapping up tax meetings with our clients which are used as working sessions in advance of their tax filing. Collaborating closely with clients and their tax preparers to determine near-term and long-term tax efficiencies, maintaining an updated financial plan and executing a disciplined investment management process are central to financial goal achievement. We believe maximizing retirement investment opportunities and optimizing clients’ tax liabilities is much more impactful than trying to figure out which of the 2016 initial public offerings is going to be the next Apple stock. Not as ‘cool’ perhaps but much more effective.

As a follow-up to our piece regarding the recent market volatility and corrections/bear markets, we wanted to also make note of the market swing in the other direction. On Monday, February 29th, the U.S. stock markets went up 2.39%, the highest one-day return in a month. Market research shows that significant declines since 1928 have only been about half as large as market gains. In spite of this empirical fact, behavioral scientists have determined that most investors feel losses twice as keenly as positive returns. Did you enjoy the uptick as much as you might have disliked the dip?

Analysts attribute the rise to a variety of economic news that suggested that the American economy is not, after all, plunging into recession. The buoyant mood among investors may not last, but for many, it’s a welcome sign that things may not be as gloomy as they seemed just a month ago. In fact, the S&P 500 only dropped about 12%, from 2078.36 at the end of December 2015 to the bottom of 1829.08 on February 11—despite widespread predictions of a 20% bear market. Since then, it has risen on shaky legs back to more than 1978, just 100 points from breaking even on the year. Two more days like Monday would erase nearly all of the damage in 2016.

The good economic news involved construction spending, which reached its highest level since 2007. Oil prices were also gaining ground, although it’s hard to see why the average American would find reason to cheer about that (gas pump prices). In addition, new orders and inventories stabilized in the manufacturing sector after experiencing downturns in the last quarter of 2015. Other factors include the possibility that U.S. stock investors may finally have decided that declines in the Chinese markets are not going to directly affect the value of American-based businesses.

Of course, none of this means that we know what will happen next. Neither we nor any of the pundits you see on the financial news have any idea whether that long-awaited 20% decline will materialize, or if the markets will continue to recover and we’ll all look back on February 11 prices as a great time to buy. It is, however, worth reflecting upon how unexpected this latest rally has been at a time when it seemed that all the news pointed to more pain and decline. Anybody who believed the pundits and retreated to the sidelines after the January selloff is now sitting on realized losses and wondering whether to jump in now and hope the gains continue, or wait and hope for another downturn at the risk of losing even more ground if this turns out to be a long-term rally.

While we can never see the next turn in the market roller coaster, long-term, the markets have performed conversely with gravity. We know with some degree of certainty in which direction the next long-term market move will be, even if we can’t pinpoint when. In fact, it is this assumption that is the single bet we make when investing your long-term portfolio.

In summary, we will experience market volatility along the journey; however, we continue to operate knowing the long-term trend is up and to the right. We are monitoring the markets each day to see if we are hitting our trading triggers, and will reach out to our clients with opportunities to harvest losses, and/or deploy cash to buy “on sale” as the opportunities present themselves. We believe our advisory role calls for us to help our clients maintain a disciplined approach, hold our clients accountable to their plan goals (when clearer minds allow for rational planning), and to insulate our clients from inevitable volatility by making sure their long-term portfolio includes only capital that will not be needed for seven or more years.