We have recently seen volatility in the financial markets pick up. The S&P 500 has fallen over 7% in the last month due to:
- European growth uncertainty
- A rapid decline in oil prices and a rise in the U.S. dollar
- Interest rate policy uncertainty
- Ebola fear
Compounding this heightened level of uncertainty are traders, hedge funds, and mutual funds taking profits to lock in gains for 2014. These market participants are driven to some extent by short term performance numbers. D3 Financial Counselors clients focus on the long term portfolio returns they need to achieve to accomplish their financial planning goals and cash flow needs.
At D3 Financial Counselors, we also have the advantage of being an independent Registered Investment Advisor (RIA). This gives us the opportunity to synthesize the best information from the smartest and most informed institutions participating in the markets. Let us share some insights from JP Morgan Chase and Goldman Sachs.
European economic growth has slowed down as a natural consequence of the Russian sanctions and a slowing Chinese economy. In the short term economic numbers may get worse. Longer term, lower oil prices and a strong dollar should help European economies compete.
Third quarter U.S. corporate earnings reported so far have averaged an 8.5% increase. Momentum investors have sold the sectors where they had the highest exposures. Average intra year declines in the S&P 500 are 14.2%. This current decline is half of the average intra year decline.
Oil prices would need to drop below $65 a barrel for U.S. production to be unprofitable. Current prices are $83 a barrel. Lower oil prices mean lower inflation and lower inflation means continued lower interest rates.
Ebola is a scare that increases potential fear and panic. The economics of Ebola are directly related to how much commerce could potentially be disrupted. Given that most of the African countries are extremely small -third world economies, any economic impact would be significantly less than the Greece crisis in 2009.
D3’s Reaction to Increased Volatility
Our client’s financial plans and hence their investment portfolios are designed to withstand volatility as follows:
Because we update our family office client’s financial plans every year, we help them understand “how much risk they don’t have to take” with their investments. In our July newsletter we stated “Due to investment performance, most of our clients can reduce risk in their investment portfolio if they choose to. “ This observation was a direct byproduct of updating our client’s financial plans. We have had a handful of clients reduce their portfolio risk as a result of this analysis. Please review your most recent financial plan update to determine whether you can afford and/or want to reduce risk in your portfolio.
Additionally we shared with you in our July newsletter that our investment review was ” focused on utilizing funds that have displayed good downside protection characteristics, especially in times of volatility”. As we complete this quarter’s fund review, we look to confirm that our investments are displaying downside protection in this market environment.
As Warren Buffet said “The stock market is a device for transferring money from the impatient to the patient.” One thing we have not done is make wholesale moves into or out of the markets based on short term news. History has taught us it is a lot better to be a little right versus 100% wrong. At this point, we see the recent economic uncertainty and market activity as a rain shower that we will be able to navigate using the umbrella’s built into your financial plans. Unless fear and panic expand exponentially, this disturbance is nowhere near the category 5 hurricane which we experienced during the 2008-2009 financial crisis. If we see an economic downturn or a liquidity event on the horizon, we will take action by raising enough cash to meet your cash flow needs.
Again, please review your most recent financial plan to determine if your portfolio risk is aligned with the risk required in your financial plan. If you want to change the risk characteristics of your portfolio or would like us to help you determine how much risk you can afford to take with your investments, give us a call at 630-271-0033.