Submitted by Lance Roberts of STA Wealth Management,
A recent CNBC article by Jeff Cox discussed that the current market rout stating:
“As hard as policymakers have sought to assure markets that they stand at the ready when conditions weaken, lack of a consistent voice has only spurred weakness, according to an analysis released Monday. Emerging market economies are in turmoil as the
While the current correction has certainly gotten everyone’s attention, it is not really all that surprising. Two week’s ago I issued an “alert” signal in the weekly newsletter followed by a “sell” signal last week. With the markets now very oversold on a short term basis, the odds of a bounce are quite high. That bounce should be used to reduce portfolio risk and rebalance allocation models.
With the Federal Reserve now seemingly committed to withdrawing support from the financial markets it suggests that there could be another ‘leg’ down in the equity markets before a meaningful price low is reached as the “risk-off” trade potentially becomes more pronounced. As I discussed previously:
“The first misconception is that when the Fed tapers its ongoing liquidity program; interest rates will begin to rise. However, there is no anecdotal evidence that would be the case as shown in the chart below.”
“In fact, the recent rise in interest rates should have been anticipated as that has been the case during both previous programs. It was not until the programs began to ‘taper,’ and eventually end, that rates fell as money flowed out of risk assets in search of safety in the bond market. This fall in rates also corresponded to economic weakness and expectations of an increase in deflationary pressures.
When the Fed once again begins to remove its accommodative support from the financial markets it will likely lead to a further decline in interest rates as ‘safety’ is once again sought over ‘risk.'”
The current correction is certainly worth paying attention because of the triggering of the“sell” signal in our intermediate timing models. This doesn’t mean that the next great “financial crisis” is upon us, but it does suggest higher levels of risk currently. While no one knows for sure what the future will bring, portfolio management is about the study of the probabilities of various outcomes both in the short term (technical analysis) and long term (fundamentals). It is from this analysis that we can make calculated choices. However, for most individuals who act upon headlines, and potentially biased commentators,“acting without knowing” generally leads to poor outcomes.
For many individuals, the best advice is to turn off the television, use the internet to view pictures of cats and leave the portfolio management process to someone who can remove the emotional bias from your money.