“Gee, Mr. Spicoli, I Don’t Know”

By David B. Armstrong, CFA | Aug 31, 2015 | Weekly Market Commentary

The past week had me quoting the famous scene from the 1982 classic Fast Times at Ridgemont High around the office on an hourly basis….

Mr. Hand: “Mr. Spicoli, why do you shamelessly waste my time?”

Jeff Spicoli: “I don’t know.”

Mr. Hand: “I like that. ‘I don’t know.’ That’s nice … ‘Mr Hand, will I pass this class?’ Gee, Mr. Spicoli, I don’t know!”

After a decent period of comparative tranquility, equity markets have at last suffered their first correction since 2011, falling 12.4% from the May 21^st highs (measured through August 25^th) and ending the third longest streak without a 10% correction in about fifty years. There was blah, blah, blah over slower growth in China, Fed rate hikes and other fears about oil weakness and U.S Dollar strength all playing a role. But how unusual is this correction? Be sure to see the chart and write-up I did last week. As it turns out, this kind of 10% correction has happened in 19 of the last 35 years.  And as for 5% moves? Well they can be found in all but two of those 35 years.

But Do You Want to Know What Really Happened? 

People lost their freaking minds, that’s what happened.  Look – here comes the most important piece of advice you are going to get this week.  If you can’t handle a 5% or 10% move down from a market all-time-high when there is no real news to cause it, you have seriously miscalculated your risk tolerance and you probably have no business being invested in the equity markets.

That’s it – it’s no simpler than that.  You either have a long-term investment plan that accounts for your need for liquidity over the next 18 months and incorporates waiting through these kinds of times or you don’t.  And I promise you that the people who don’t make decisions that are based on fear, greed, anxiety, guesses and hope.

For those worried that we are about to enter another 2008 type situation, I provide this chart that comes from Charles Sherry.  If you don’t feel like reading it, it says that most everything is completely different.

So What Now? 

Well I have a few thoughts:

1. We don’t see this correction leading to a bear market (defined as a loss of 20% from the high) because the U.S. economic data remains solid, commodity prices and inflation are low, and monetary policy will remain extremely accommodative … even if or when the Fed hikes rates.
2. No one knows what’s happening and that’s why there is no such thing as a professional coin flipper. It’s fine to listen to people explain what DID happen, and hell, it’s even okay to listen to the people who are trying to guess about what’s going to happen … just don’t act on it.  Again, rely on a plan. It’s the best strategy.
3. Do an autopsy on your recent behavior. Let’s just say that you sold at the very bottom on Monday. Okay, it turns out that there is something very valuable to be learned from this.  People who find themselves in this situation are going to set themselves up for success going forward because they are either going to realize the true benefit of having and sticking to a longer term plan, or they are going to realize that they never had the stomach for the risk in the first place and will do a complete reassessment of their entire situation.  There is nothing wrong with anyone determining that the level of risk they had was much higher than what they were comfortable with.  Go back to the drawing board and figure out the right combination that supports the plan and overall objective.
4. China and the Emerging Markets (EM) – We think that sentiment in general is at a rock-bottom level and this despair is overblown. We are not putting cash to work in either place, but are just pointing it out.
5. With all of this volatility, it’s important to pay attention to two huge global economic engines: the U.S. and Europe. While it’s hard to really focus on this, both are in good cyclical shape and foreshadow better global trade ahead.
6. Deflation fears are overblown.
7. We made some changes to our portfolios recently, but our overall investment stance remains decisively pro-growth.

Have a Plan and Stick to It. 

I hate to make it sound that simple … it’s like when doctors say, “Eat more vegetables, cut back on red meat, drink less and exercise more…”  Jeezzz, no kidding!  But they’re right and just because it seems like basic common sense, it does not mean it is overly simple advice that only applies to everyone other than you.

What’s the Market Going to Do Over the Short-Term?

It’s like Mr. Hand says, “Gee Mr. Spicoli, I don’t know…”  But in case you find yourself without a plan (you should seriously call us) and asking yourself “should I bail or buy?” I think you’d be pretty damn happy five years from now buying rather than bailing.

Call with questions or concerns.

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