Of course, the ship is the stock market. The bottom part of the boat includes the most aggressive and smaller company stocks, then a little higher are the mid-size company stocks and then, finally, the largest, big name stocks, especially large dividend paying stocks. The decline has been very protracted and many believe this is because, with bonds offering practically no yield, money flows (even if reluctantly) to dividend paying stocks. The water will eventually get there.
In the last 3 years, the percentage of NYSE stocks at or approaching new highs has gone from 50% in 2013 to 38% to 22% and now 17% (Lowry’s On Demand market research). The number of stocks that are down 20% or more from their highs (said to be in an individual “bear market”) since 2013 has gone from 12% to 14% to 27% to 37% now (courtesy Lowry’s also).
We are seeing all the classic signs of an incipient bear market. This is just a regular cyclical event. Demand is drying up and selling rises every time stocks attempt to reach new highs.
What About Brexit?
Looked at in isolation, Brexit should not necessarily have much effect on US stocks. But you can’t view it in isolation. My view is that Brexit may have been a catalyst to hasten what is otherwise already in progress – a ship taking on water. If the patient is already sickly, any virus is bad news.
What About The Political Scene?
Financial markets hate uncertainty (in fact, this is the word you hear most often regarding Brexit}. The last year of a lame duck presidency is often bad (remember 2008, 2000???} for this very reason.
What About Interest Rates?
I’m convinced that the Federal Reserve, with all its interest rate and money printing machinations, only delays the inevitable. They certainly have not delivered a robust economy. I’ve always said that the bear market (and possibly concurrent recession) ARE THEMSELVES the cure to what ails the markets and the economy – much like a sick pet that just needs to vomit and get the bad stuff out. The Fed has painted itself into a corner. Regardless of any and all pronouncements, they know that raising interest rates would quickly bring the curtain down on this already weak economy. I hold with those who believe the Federal Reserve should simply follow formulaic guidelines so everyone knows exactly what will happen.
What Are We Doing?
Everyone wants to make money all the time. Interestingly, a major market tumble is the best medicine for that – IF, IF, IF you can hold onto principal fairly well while it goes on. The year after a bear market generally represents the best returns in a market cycle. So, as you’ve noticed, we are fairly conservatively positioned.
If you would like to discuss your account in light of all the above, please contact me.