“After a strong start to the year driven by institutional investors, skepticism over the sustainability of the rally is now unanimously in question as bears begin to wrestle control from the bulls,” said Mark Hackett, chief of investment research at Nationwide. This pretty much sums up what we have been observing since the start of the year.
When looking at February’s chart, it is evident that momentum and confidence has declined.
Late last month El-Erian, President of Queen’s College Cambridge and chief economic adviser at Allianz commented that he is not optimistic about the Fed’s ability to reach its target (Watch El-Erian: Markets Doubt Fed’s Ability to Hit 2% Target – Bloomberg). If we couple this with recent US housing market declines (US Housing Market Posts $2.3 Trillion Drop, Biggest Since 2008 – Bloomberg), one can clearly see why we have been raising cash to offset ongoing headwinds. While it is not uncommon for markets to experience periods of high volatility, investor behavior often plays a big role in market movements. In periods of high uncertainty, investors struggle to assess the implications of shocks to the economy and their emotions tend to prevail. This can lead to overreactions where market volatility can fall or rise rapidly and sharply. Ultimately investors sell at low levels, fearing that greater losses are around the corner.
Though easier said than done, keeping a long-term objective and constantly monitoring those objectives is the best action to take during volatility. In the long run, economies and asset prices tend to expand given time. The key takeaway for investors is don’t let gloomy short-term news dominate your long-term financial planning. Stick to a plan, but make adjustments when necessary. This will remove emotions and set expectations throughout.
As always, we welcome your thoughts and feedback. Should you want to discuss this or any other concern, please use this link to schedule a conference call/video.