Fear instead of cheer: Santa delivered coal to equity investors this past season. I suspect the Grinch might have had a hand in the worst December for U.S. equities since 1931 as well. CNN’s “Fear & Greed Index” is registering extreme fear readings. I’m sure there will be another tweet before it’s all over, another Chinese trade dispute, another tariff war, maybe the Federal Reserve Chairman will walk out, or the cheese crisis* will get worse: Make it stop…. Please.
Rallies always stop before we want. Downdrafts never do. So, is it reasonable to believe that the market distress we’ve experienced portends the beginning of the end to our economic growth, our bull market? If not, then what’s going on? Why did equity markets drop so precipitously?
Certainly, the noise we are experiencing across all channels has something to do with the downturn. But the severity of the downturn, the sheer volatility of it seems unprecedented to me. So, what started as a normal correction, a blip, turns into a waterfall of knives; because, of two things, in my opinion.
First, Indexing – according to Morningstar about 47% of all assets invested in U.S. stocks are invested in index funds or ETFs. John Bogle, the founder of the Vanguard Group and the individual who started the trend towards index investing over forty years ago, has recently acknowledged and warned that indexing could cause exaggerated price swings in equity markets. Why? Because indexing does not rely on participants engaged in equity research, analysis and portfolio management. Buying and selling indices affect the entire spectrum of holdings: It does not separate the good companies from the bad ones.
Second, Lemmings – according to the Wall Street Journal “Roughly 85% of all trading is on autopilot—controlled by machines, models, or passive investing formulas, creating an unprecedented trading herd that moves in unison and is blazingly fast.” So that leaves active managers, not machines, to make portfolio decisions based on individuals’ financial plans and goals. And, please remember, volatility is a two-edged sword, yesterday, December 26th, the Dow Jones Industrials had their biggest day ever as the index climbed in excess of 1,000 points – the lemmings at work again.
As equity markets relinquished their entire gains for the year and crept into negative territory the Christmas shopping season set a new five-year sales record – we spent over $850 Billion buying delights for each other, things cannot be all bad.
As the story goes: The Grinch saves Cindy Lou, realizes Christmas is not about shopping and ends up with the girl to boot. 2019 is starting on a good note. Let’s look forward to a great year. Cheer-up!
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Carlos Dominguez – Portfolio Manager, RJFS
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