Posts tagged ‘Hamlet’
To Test or Retest?
In Shakespeare’s tragedy Hamlet, the main character Prince Hamlet raises the existential question to himself, “To be, or not to be, that is the question?” With the recent -13% correction in the S&P 500 index, and subsequent mini-rebound, a lot of investors have also been talking to themselves and asking the fundamental question, “To test or retest, that is the question?” The inability of Fed Chairwoman dove, Janet Yellen, to increase the Federal Funds interest rate target by 0.25% after nine years only increased short-term uncertainty.
For investors playing in the stock market, uncertainty and corrections are par for the course. Howard Getson at Capitalogix recently pointed out the following.
Since 1900, on average, we’ve experienced…
- -5% market corrections: 3 times/year.
- -10% market corrections: 1 time/ year.
- -20% market corrections: 1 time/3.5 years.
However, no market correction is the same. Sure it would be nice if, during every bull market, the pain from any -10% correction lasted a second – similar to ripping off a Band-Aid. Unfortunately, when you live through such rapid and violent corrections, as we just did, volatility tends to stick around for a while. And in many instances, any brief rebound in stock prices is met with another downdraft in prices that retests the recent lows in prices.
In the recent correction example, a retest of the lows would mean another -5% drop, on top of Friday’s -2% cut, to a level of 1,867 on the S&P 500 index. This is definitely a realistic probability (see chart below).
Chart Source: Investors.com (Powered by IBD)
Although corrections are quite common, violent corrections are less common. Scott St. Clair, an analyst at MarketSmith, a division of William O’Neil & Co., recently did a study examining the frequency of 10%+ corrections occurring in four days or less across the three major indices (Dow Jones Industrial, S&P 500, and NASDAQ). Before the latest -15% decline in the NASDAQ from August 19th to August 24th, St. Clair only identified drops of -10% or more (in four trading sessions) eight previous times since the Great Depression (six of the eight periods are listed below).
- DJIA May 1940 -26% in eight days
- DJIA May 1962 -16% in 10 days
- S&P 500 Aug 1998 -15% in five days
- S&P 500 July 2002 -25% in 13 days
- S&P 500 October 2008 -33% in 15 days.
- S&P 500 August 2011 -19% in 13 days
Following all these corrections, the market always rebounded, but what St. Clair showed was in many cases stock prices had to retest the previous lows before advancing again.
As Mark Twain said, “History doesn’t repeat itself but it often rhymes,” which explains why this study is a useful historical exercise to prepare investors for potential future downdrafts. With that said, for long-term investors, much of this utility is marginal at best and useless at worst.
If you can’t handle the volatility, you need a more diversified portfolio, or you need to park your money in a savings account or CD and watch it melt away to inflation.
In reviewing corrections, famed growth investor Peter Lynch said it best:
“I can’t recall ever once having seen the name of a market timer on Forbes’ annual list of the richest people in the world. If it were truly possible to predict corrections, you’d think somebody would have made billions by doing it.”
Whether the August 24th low was the only test of this correction, or investors retest it again, is a moot point. Ignoring irrelevant headlines and focusing your attention on a low-cost, tax-efficient, globally diversified investment portfolio is a better use of your time. That is a tenet for which Hamlet would certainly be willing to die.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) , but at the time of publishing, SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
To Taper or Not to Taper…That is the Question?
It’s not Hamlet who is providing theatrical intrigue in the financial markets, but rather Federal Reserve Chairman Ben Bernanke. Watching Bernanke decide whether to taper or not to taper the $85 billion in monthly bond purchases (quantitative easing) is similar to viewing an emotionally volatile Shakespearean drama. The audience of investors is sitting at the edge of their seats waiting to see if incoming Fed Chief will be plagued with guilt like Lady Macbeth for her complicit money printing ways or will she score a heroic and triumphant victory for her hawkish stance on quantitative easing (QE). No need to purchase tickets at a theater box office near you, the performance is coming live to your living room as Yellen’s upcoming Senate confirmation hearings will be televised this upcoming week.
Bad News = Good News; Good News = Bad News?
In deciding whether to slowly kill QE, the Fed has been stricken with the usual stream of never-ending economic data (see current data from Barry Ritholtz). Most recently, investors have followed the script that says bad news is good news for stocks and good news is bad news. So-called pundits, strategists, and economists generally believe sluggish economic data will lead the Fed to further romance QE for a longer period, while robust data will force a poisonous death to QE via tapering.
Good News
Despite the recent, tragically-perceived government shutdown, here is the week’s positive news that may contribute to an accelerated QE stimulus tapering:
- Strong Jobs: The latest monthly employment report showed +204,000 jobs added in October, almost +100,000 more additions than economists expected. August and September job additions were also revised higher.
- GDP Surprise: 3rd quarter GDP registered in at +2.8% vs. expectations of 2%.
- IPO Dough: Twitter Inc (TWTR) achieved a lofty $25,000,000,000 initial public offering (IPO) value on its first day of trading.
- ECB Cuts Rates: The European Central Bank (ECB) lowered its key benchmark refinancing rate to a record low 0.25% level.
- Service Sector Surge: ISM non-manufacturing PMI data for October came in at 55.4 vs. 54.0 estimate.
Bad News
Here is the other side of the coin, which could assist in the delay of tapering:
- Mortgage Apps Decline: Last week the MBA mortgage application index fell -7%.
- Jobless # Revised Higher: Last week’s Initial jobless Claims were revised higher by 5,000 to 345,000.
- Investors Too Happy: The spread between Bulls & Bears is highest since April 2011 as measured by Investors Intelligence
Much Ado About Nothing
With the recent surge in the October jobs numbers, the tapering plot has thickened. But rather than a tragic death to the stock market, the inevitable taper and eventual tightening of the Fed Funds rate will likely be “Much Ado About Nothing.” How can that be?
As I have written in an article earlier this year (see 1994 Bond Repeat), the modest increase in 2013 yields (up +1.35% approximately) from the July 2012 lows pales in comparison to the +2.5% multi-period hike in the 1994 Federal Funds rate by then Fed Chairman Alan Greenspan. What’s more, inflation was a much greater risk in 1994 with GDP exceeding 4.0% and unemployment reaching a hot 5.5% level.
Given an overheated economy and job market in 1994, coupled with a hawkish Fed aggressively raising rates, the impact of these factors must have been disastrous for the stock market…right? WRONG. The S&P 500 actually finished the year essentially flat (~-1.5%) after experiencing some volatility earlier in the year, then subsequently stocks went on a tear to more than triple in value over the next five years.
To taper or not to taper may be the media question du jour, however the Fed’s ultimate decision regarding QE will most likely resemble a heroic Shakespearean finale or Much Ado About Nothing. Panicked portfolios may be in love with cash like Romeo & Juliet were with each other, but overreaction by investors to future tapering and rate hikes may result in poisonous or tragic returns.
Referenced article: 1994 Bond Repeat or 2013 Stock Defeat?
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct position in TWTR, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page. Some Shakespeare references were sourced from Kevin D. Weaver.
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