Market “corrections” of 5-10% happen all the time; market corrections of 20% or more are almost always valuation-driven or recession-driven. We do not believe the 5% variety are: a) avoidable), or b) concerning; we defend against the malignant kind with asset allocation and valuation awareness. The U.S. dollar is the primary catalyst right now both in terms of cause and effect – big, short-term impact in commodity and rate markets. QE in Japan IS not going away any time soon, but is no substitute for organic growth. Invest for organic growth, and validate that growth through dividend practices. Yields in Europe are modestly up despite QE, and this should be no surprise to us here in the states. Floating Rate bank loans have appreciated in value 36 of the last 42 times that interest rates rose .2% or more. Energy markets face political catalysts, particularly around crude oil export restrictions and liquefied natural gas exports. Oil prices have rallied a lot, and people are stunned that U.S. producers didn’t die. Their resilience can be explained by the strongest capital markets in the world. For contrarians, recent stock market outflows from retail investors are a bullish sign.
What is your strategy for dealing with the next “market checkback”?
It depends on what one means by “market checkback.” The drops of 5-10% or so, for example, are what most people mean, and each time such a period happens the media (and many investors) do respond as if the black plague has come upon us. A mathematical fact, though, is that over the last six years we have had twelve (that is not a typo) separate incidents of a 5-20% drop (all but two of those being 5-10%), and yet the market is up 258% (also not a typo) in that time frame. The 5-10% type drops are: a) Never going to go away, b) as untimeable and unavoidable as weather, and c) of no threat to a single client’s carefully constructed portfolio. Therefore, I do not “deal” with a market checkback other than celebrating the reduced entry point they provide us via our dividend reinvestment. Now, if one means more severe “checkback” (the 20-50% variety), my “strategy” is to be very valuation conscious, to be contrarian, wary of bubble formations, concerned by risk complacency, and a research hawk around potential recession causation. “Black swan” events though – the very rare market drops out of simply invisible issues in the marketplace – are, by definition, unseeable. History tells us that a focus on risk and valuation is the best defense.
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