"Helping You Navigate the Course to Financial Freedom"
August 21 2015
What's Going On in the Markets?!?

As I write this on Friday afternoon, the Dow Jones Industrial Average is down over 300 points, erasing all its gains and then some, to register an almost 5% drop for the year.   The price of oil is plunging below $40 a barrel, its lowest level in almost 7 years.   The yield on the 10 year Treasury bond has fallen to below 2.04% after a recent high in July of over 2.40%.  The Russian ruble has tumbled 20% versus the US dollar in the last month - other emerging market currencies such as China and Brazil have fallen more than 3%.  Gold, always a favorite in times of trouble, hit a 52-week high.

"What's going on in the markets?" a friend asked me this morning.  And I frankly didn't have an immediate answer for him.  That's not to say I couldn't come up with a "story" to explain the market action - continued weakness in the price of oil; fears the Federal Reserve will (or won't) raise interest rates in September; military tension around the world, most recently between North and South Korea; or the fact we're "due" for a correction.  I could come up with plenty of stories - and I'm sure you'll see many of those in the headlines as "the" explanation for what's happening.

But I think the real answer is all of these, and none of these.  Let me explain a little further.

Ever since the financial crisis of 2008, interest rates around the world have been kept at artificially low levels.   Savers have had nowhere to go to get any kind of return on their money, and have been "forced" into markets (such as equities) that have a higher risk profile than they would normally prefer.  Safer investments, such as bonds, were abandoned because of low returns.   But these "new" equity investors, with their lower risk tolerance, are much more sensitive to perceived risk.   Afraid of loss, their equity investments can't truly be viewed as long term - they have essentially become "short term" traders, selling when markets go down and buying when markets are up.

Another way to think about it is to envision a large ship on the ocean, with all the passengers running from one side of the ship to the other.  When equity markets are going up, all the passengers rush to enter those markets for their potentially higher returns, leaving the ship unbalanced.  When equity markets go down, passengers  rush to the other side, eager to invest in safer (and lower return) investments.  Again, the ship becomes unbalanced.  Until the distortion of artificially low rates is removed, we can't expect this kind of behavior to abate.  Markets will continue to jolt higher and lower, back and forth, until we can re-discover our natural equilibrium.

Does any of this affect our fundamental advice of living below your means, saving aggressively, investing in a balanced portfolio, and enjoying life?  No, it does not. 

But it also doesn't mean that I don't find this market "noise" distracting and upsetting. 
On the brighter side, looking out longer term this kind of a market disruption has almost always provided an opportunity to pick up good stocks at a cheaper price.  And if the Federal Reserve does indeed begin to raise rates in the fall, we may once again be able to pick up fixed income investments with a decent return.  So rather than being a disaster, this disruption may turn out to provide a double benefit.

But since many market participants are traditionally on holiday during the month of August, l may wait a little longer to see how things continue to play out.  I'd rather miss a little bit of the upside than jump in too early and find out I've just caught a "falling knife"....

Please call me if you have any questions or concerns about your own portfolio.
With warm regards,

Data from CNBC

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