What 'might' be driving this bear market, and what can you actually do about it

Last week was another wild week. Over the past six to 12 months we’ve basically been in a bear market for most major equities. Perhaps you noticed.

There are a number of issues brewing in the market that “might” be driving things (it’s never just one thing):

1. Valuations going into 2015 and 2016 in U.S. markets were — and may still be — high. This has been the case for a while, perhaps even going back a few years, so it shouldn’t surprise anyone that we’re experiencing a pull back. However, valuation indicators are very hard to exploit profitably in the short-term and so it’s likely not worth anchoring your portfolio strategy on this. Further, earnings seem to be losing steam and the U.S. dollar increased dramatically in 2015. So when economies are slow growing the dollar strengthens, earnings fall, and you’re trading at high multiples, your momentum naturally moves the other way in order to adjust to these changes.
2. China’s economy and currency devaluation. China’s growth is slowing and its GDP numbers are not transparent, so you have a huge wildcard overseas. They are devaluing their currency because they might have to. This is a big deal simply because China influences global trade, commodity prices, and demand around the world, which influences all major capital markets.
3. A dip in oil prices. This continues to be good for the pocketbook but very bad for a major sector of the U.S. and global economies. Oil is not a demand problem with the economy; in fact oil demand has picked up. There’s simply way too much supply right now and it will take time to work itself out. Furthermore, Iran is now a serious market player in oil exports and OPEC is probably no longer as impactful as it used to be. Oil pricing impacts markets more than just oil stocks; it also influences bond markets and emerging markets.
4. Central banks are no longer as accommodating (0% interest rates, bond programs, etc.). During the last few years we experienced both some of the lowest volatile years on record in the markets, plus a six-year U.S. stock bull market financed by historically low rates. Investors may have gotten used to this. Don’t assume the past five to six years are reflective of markets. Central bank departure will increase volatility. Volatility is also a natural and necessary component of long-term investing.
5. Investing on margin seemed to have peaked in the past six to 12 months. With the recent and fast market drop, margin calls can pour in. Margin calls are when leveraged investors must pay the debt they owe on their leveraged stock if the stock falls to levels where the stock value doesn’t properly cover the debt-to-stock ratio. So where do they get the money to pay the loan? Well, they sell the leveraged stock, which further amplifies the loss. It’s a forced trade whether the investor wants to sell or not. As an aside, investing on margin is another one of those mega-stupid things to do with your money (I wrote about others last month).

All of this is interesting, right? Sure, great coffee talk, but pretty useless in your planning. Why? Because EVERYONE already knows about this, meaning it’s already priced into the market (and there’s nothing anyone can do to change it). Markets react violently (up or down) only when new information — information the typical investor likely knows very little about — gets repriced into markets.

(Continued)

More importantly, if you have a long-term plan none of the above really needs to matter, or at a minimum shouldn’t matter as much as the media would have you believe. So plan with what you know.

• Lay out reasonable goals and build a plan to achieve them. Few people do this, but those who do plan are the ones who actually achieve their goals. They do this often with little concern for what the market is doing at the time.
• Insure for risks you can’t pay for yourself. Whether it’s a bull or bear market, if reasonable insurance is not in place, no portfolio strategy on the planet will ever help you if a major risk occurs.
• Adjust your spending and saving, since this is within your control.
• Save for short-term obligations with cash and short-term investment grade bonds.
• If you can handle the risk, invest for long-term obligations primarily with diversified stocks and bonds. Most folks cannot live on cash yields, while inflation will eat up their principal faster than they might. Thus, they choose to or need to invest. Separating short-term needs from long-term investing allows you freedom from caring about the short-term noise.
• Course correct. If any of the above requires changes, correct for it. Don’t sit on your hands.

I sound like a broken record, don’t I?

MICHAEL DUBIS is a fee-only CERTIFIED FINANCIAL PLANNER™ and president of Michael A. Dubis Financial Planning, LLC. He also previously served as part-time lecturer at the University of Wisconsin Business School James A. Graaskamp Center for Real Estate. Mike can be reached at financialperspectives@gmail.com.

Disclaimers: This article contains the opinions of the author. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services described in this website or that of the author’s.

Mike Dubis does not guarantee the relevancy, appropriateness, or accuracy of any outside information or links. Mike Dubis does not render or offer to render personalized investment advice or financial planning advice through this medium. All references that might be made to an investment or portfolio's performance are based on historical data and one should not assume that this performance will continue in the future.

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