Four takeaways from the Dow selloff

Last week we wrote about riding out the storms when the Dow Jones tumbles, this week we want to jump off that a bit. Here’s a five-day chart of the Dow over the past week, we see a pretty sharp swing downward, then a turn around as we seem to be leveling off:

We came across an excellent blog article on three takeaways from the Dow sell off and feel there are a few points embedded here that strike a chord specifically with our own philosophy. We can break this down into our primary points of emphasis that we want to drive home. When the market swings, remember these nuggets of wisdom.

This is a growth correction

We have enjoyed outstanding equity growth this bull market. Traditionally bull markets end when the economy stops growing and heads into a recession. If you think about the stock market investors are purchasing the present value of future dividends and growth of a company; when the economy is growing, then it is logical to expect companies to do more business and dividends to increase and the company to grow. If the economy is in recession, (negative economic growth) then it is reasonable to expect the company’s earnings and stock price to shrink.

This sell-off was not due to fear that the economy is going into recession, rather the opposite: there was a very favorable jobs report and unemployment that was 7% not too long ago is now 4%, the world economy is growing, and there is talk about 4% GDP growth in the US, numbers that experts told us would not happen again and we should expect 1-2% as the new normal. So last week the market got worried about too much growth, too much demand and inflation, and that the Fed will be more aggressive in raising interest rates. So we saw declines in both the Stock and Bond Market.  This is fear of inflation, not a recession so we continue to advocate allocation to equities to benefit from world economic growth.

ETFs helped

There is a temptation from some to blame ‘robo advisors’ for making a bad situation worse, however looking at the data that is simply not true. The article cites that on the selloff ETFs made up a mere 3% of trading volume thus making it impossible for them to drive a selloff. How could they?

We already know this though, it’s actively managed funds that are reactive towards price changes that tend to run into more trouble rather than broadly managed ETFs and index funds. It’s just safer, knowing your risk allocation, to set your money in a fund and grow with the market rather than time or beat it. The former allows you to ride the wave and come out on top when the market rebounds, the latter is a good way to sell low and end up buying high – pretty much the opposite of what you should be doing.

If we want to blame Robo’s then blame the robots for taking over the market, Program trading and algorithms take in data at a millisecond and trade, short, and make speculative bets on the price movements of stocks. This, in turn, spurs other robots, that are trying to take advantage of this volatility which creates the massive swings in prices. Long-term investors are best served to stay out of the speculation storm and do nothing,

Now is the time to buy

Don’t make the mistake of looking at this as a market downturn, rather it’s a market correction on an economy that is otherwise doing quite well. With jobs reports returning positive news as well as Tax Reform fueling corporate growth, there’s no reason to expect the economy to slow down anytime soon.

When we start to see a slight downturn this isn’t a predecessor to a crash as much as it is a misstep and reevaluation of a strong and growing economy. Rather than join the panic and selloff now is the time to buy as the market undervalues itself.

Don’t get caught in hysteria

Ultimately, the biggest takeaway is to not get caught up in the fuss.

Yes it may seem like the sky is falling if you check the Dow price changes minute by minute throughout a rough day, however, that’s not our philosophy and that’s not what we’re about. It’s easy to get swept up in the emotion of the market swings and join the selloff however that can only lead to disastrous results. You cannot time a stock and you certainly cannot time the market, trying to do so only ends up being costly and ineffective.

The better strategy is to understand your personal tolerance for risk, take a long-range outlook, stay on top of the economic forecasts and what they may mean for your diversification and strategy, and ensure you are getting a good night’s sleep. Leave tossing and turning for active managers and so-called analysts.

Going Forward

At M3 we believe that it’s best to understand yourself, your philosophy, and invest accordingly. It’s about investing in the long run to secure your future. To do that you need to understand your goals, and your tolerance for risk and investing approach. Haven’t done either?