We’re Not In Kansas Anymore

In our last market comment, we quoted Dorothy, who noted in the Wizard of Oz that she was in world that was very different from the one she was used to. Dorothy’s words could describe the financial markets of the last six months. Although what we see seems familiar, a lot is different. Tuesday, the Dow turned negative for the year in spite of a strengthening economy. There has been a change in the rhythm of the economy and markets, and we’re not in Kansas anymore.

Since 2009 we have seen a powerful economic recovery as the stock market recouped its losses and moved to new highs. It has taken five years to earn back what was lost in six months back in 2008.

As the recovery has taken hold, equity markets have posted steady gains while low interest rates have offered little return. Retail investors, anxious to not miss the recovery, finally began buying stocks during the last half of 2014 and into 2015.  This confidence in the market has led to boldness, with margin debt the highest it has ever been.

But in late 2014, market trends changed.  This chart shows that since early December the US market’s upward trend has stalled and stocks have been flat for six months.

We are now in a transition market. While there is still good news concerning U.S. jobs, U.S. production, and the Europe recovery, there are questions about the longer trends. There is quite a divergence of opinions among the “experts”, and no one knows what the future will bring. The financial world is a different place than last year.

The result is that none of the major asset classes have provided returns this year. For the last six months the stock market has traded in its narrowest range since 1964. Rates are still low, and commodities and real estate have not regained their pre-crisis levels. While we don’t expect to see a large downturn soon, we do believe risk is much higher.

Calyx uses risk management to protect our clients from the next sharp downturn. None of us want to see the losses that were experienced in the early 2000’s and 2008.

We protect every investment position with a stop loss to retain profits and exit positions that lose value. In an up market, this risk protection is virtually free. In a down market, this protection is priceless, exiting the market before the damage is too great. In a transitional market, where there is no real trend and prices move up and down, we accept small losses rather than further exposing the portfolio to more damage. These transitional markets are those where risk is highest and protection is most needed. We’re not in Kansas anymore.

As an investor, now is the time for discipline. We believe a risk management plan that protects core value is essential to avoid the quick, painful panic that may be just around the corner. This doesn’t mean that we have abandoned our search for growth opportunities, and in fact we are finding them. But we are also mindful that the market trend has yet to resolve itself.

Some additional thoughts…

  • China has stimulated their economy, loosened credit, and encouraged domestic investment. The Chinese economy may be stalling and we see a bubble developing.
  • Cheaper oil prices and a strong U.S. Dollar will be with us for the foreseeable future. Both of these will impact our lifestyles and our investments.
  • Healthcare and technology continue to be strong in a changing society that is both aging and becoming more technology oriented.

 


At Calyx, we help families with accumulated assets protect and manage their financial resources. We are a financial advisor and investment manager that partners with our clients to administer their financial affairs with personal attention and active management. We manage individual accounts with a conservative family portfolio management program. This is the only program of which we are aware available to retail investors that includes true investment protection, low fees and a track record of delivering returns.