A fond memory I have growing up in Oklahoma City is driving to Dallas, Texas to go to an amusement park called Six Flags. When I was around twelve years old, they introduced a new roller coaster called the “Shock Wave”. This roller coaster not only went really fast but the main attraction was that it would do two complete summersaults in the air throughout the ride. When you would get off the ride, your hair would be standing straight up, your body would be badly shaken, and you would feel extremely nauseous. As I gathered my notes to write this Commentary, it was these feelings that I was reliving in how to best describe the Market we are experiencing. (For those of you who may be questioning my memory, one of my staff members did discover this roller coaster is still running at the Six Flags amusement park in Dallas, Texas.)
I think it is pretty obvious that the entire last quarter has been extremely difficult for investors. The ongoing volatility, punctuated by several steep one-day losses, and then the decision by Standard & Poor's to downgrade the credit rating of the long-term U.S. government debt has been quite unnerving. I have been in this business for over 20 years, and I would like to tell you that I understand these kind of rough quarters, but it doesn’t mean that it is easy to get through them. While I will continue to stress that it is important to stay focused on the long term, I understand how extremely difficult this can be to follow as tumultuous as the Market has been.
The intent of our Commentary is to summarize, in an understandable way, what has occurred in the Market and the economy and why. Our goal is to educate on what is happening. We are not recommending making changes based on events or concerns in the Market.
When analyzing the events in the 3rd Quarter, things were an absolute mess and most of that mess was self-inflicted from our politicians in their effort to regulate and control policy. The mess essentially began with the drama surrounding the extension of the debt ceiling. What most people do not realize is that prior to the debt ceiling being increased this time, it had been increased 10 times in the last 10 years and 78 times since 1960 (NY Times). It was a measure that was necessary throughout the years but did not get the media attention. Unfortunately, this particular time, the Republicans said, “Enough is enough” and tried to strengthen their party by essentially drawing a line in the sand. I feel that their stance was that this administration is spending too freely and budgets must be regulated. This political battle happened during a time when Republicans controlled the White House, but we had a democratic President. We essentially witnessed politics at its worst with each party making new promises of fiscal responsibility and legislation, even though neither party had a good track record of acting in such a way. The arguments and bitterness between the parties made the yelling and screaming of WWF or WWE seem dull in comparison. I truly believed all along that the debt ceiling would be raised, but the media added a lot of drama. We each had the opportunity to witness this feud, see nothing getting done and websites showing the countdown of when the government would shut down. Individuals who are not well versed in “normal” politics began getting very nervous and then when the Market started to tumble, confidence was at an all time low.
One cannot blame the loss of confidence when we analyze the chain of events that occurred once the ceiling was passed. The ceiling increase was agreed upon late on a Sunday evening, approximately 36 hours before the deadline. The following Monday the Market was flat so most breathed a sigh of relief. Then came Tuesday and the walls started to crumble down. First, many of the larger companies that make up the S&P 500 Index released their earnings’ reports, which were significantly less then expected. Next, Standard & Poor’s downgraded the credit rating of long-term U.S. government debt. When this news hit the media, we began riding on the “Shock Wave” rollercoaster. Although we did have some good days where the Market spiked up quite a bit, the bad significantly outweighed the good. We watched the Market fall by 7.03% in September and down for the 3rd Quarter by 13.87% (BTN Research).
When this Market slide began, we had a lot of employees fearing that this is 2008 all over again. In looking at the fundamentals of the Market, there is both good news and bad news in comparison to 2008. The good news is that there really is not any one specific issue that caused the Markets to fall the way they fell. Unfortunately, this is also the bad news because we are falling based on fear and lack of confidence in our policy makers. The economy is growing, but it is doing so at a snail’s pace, and while the banks are in much better shape, real estate values have fallen so much that people are not in a position to buy new homes as they are under water in their existing homes. Big business is moving forward but at a much slower pace then we have seen for some time.
The problems that have affected the Market for some time are still right in front of us. Unemployment remains in excess of 9% and recent indicators show that that will not change between now and the end of 2012. Real estate continues to fall with little movement on sales of existing homes as well as little to no production of new homes. The other two significant issues that haven’t changed are the European debt crisis and the problems in Washington D.C.
So, with all of this “mess” and feeling like we want to get off the ride, I still can say do not head off to the sidelines. While the thought that “I would like to sit this one out” sounds appealing to most, even amongst all the doom and gloom that appears to be taking place, the Market continues to go forward. For the majority of our readers, their retirement accounts are long-term investments. Every day the Market can go up or down and in fact at the time I am writing this Commentary, the Dow Jones is up 600 points for the week and YTD is down only 3% (BTN Research). Historically, the 3rd Quarter is the worst quarter of the year followed by the 4th Quarter, which is the best quarter of the year. Even with the mess surrounding us, I would not be surprised to see the Market finish the year in positive territory, which would mean a Market gain of almost 10% for the quarter. If you are on the sidelines, you are missing the opportunity for recovery.
While I know this has been a very difficult time period, please know that we are here for you. If you have questions regarding your financial situation or your investments, please do not hesitate to contact me directly at (216) 595-0700.
Latest Updates & Information
The U.S. economy continues to stay in very healthy territory. Unemployment has stayed below 4% for many months while not showing the feared effect that an undersized labor force would have on productivity, and only showing mild wage inflation.Read full story here
The 3rd quarter continued the economic progress seen so far in 2018. This good progress was seen in the extension of a bull market through Q3.Read full story here