The Dow just had its second 1,000 point drop in less than 1 week. At today’s close, the S&P has now experienced a 10.16% correction. While not out of the norm of historical market activities, this decline marks the first double digit retracement since January 2016. Clearly the speed of the decline is what has participants on edge as buying interest seems to be drying up and stocks are struggling to find any support whatsoever.
Despite what I feel was excellent market foresight on our part, the decline still hurts; and, of course, one always wants to have more cash when the markets are going down and more exposure when they’re going up. The only question is whether the market decline will continue or if buyers will step in and scoop up what seems to be selling at any price? Unfortunately, not a single person knows the answer to that question.
Not helping matters is Congress’s inability to strike a budget deal which is resulting in the second government shutdown this year. My guess is that overnight we will see continued selling in Asia and Europe and we will come into the morning with US futures in deep red territory. Any variation of this which results in a morning gap higher would, in my opinion, be sold quickly as trapped traders look to salvage what they can.
I am speaking with many folks who are wondering if this is a repeat of 2008. My short answer is, no. That bear market was led by a liquidity crisis in the banking sector, fueled by financial greed and recklessness in the mortgage and housing sector. The issues were systemic, they threatened our financial system as a whole and required trillions in liquidity to ward off a complete financial collapse. Today’s decline seems to be precipitated by nothing more than elevated stock prices and concentrated ownership, through the indices, in just a handful of high-beta, extended stocks. While the correction has been needed and is long overdue, I believe what we’re seeing is the direct result of index ownership unwinding among all sectors, with no place to hide. While the action is not similar to 2008, it is similar to 1987; which, as you know, resulted in an October crash when liquidity dried up and no one could exit stocks. While a crash is never a high probability bet, it is something that is always possible and must be taken into consideration.
At this juncture we will continue to follow the strategy we have laid out and been following for several years now. We already have elevated cash levels through our previous prudent maneuvers and will sell more positions should prices warrant. We will not allocate new positions into a market in freefall simply because prices seem ‘low.’ Thankfully, all client allocations and exposure remain in-line with goals and are not overly aggressive. While I’ve written many times about how annoying it is to give back gains, it is part of the process of investing and required if we’re going to avoid being shaken out on any retracement. Many of our positions that were, prior to today, still within a ‘hold zone’ now find themselves dangerously close to levels where we must exit and step aside.
It seems like just the other day we were pondering whether the Dow would cross 20,000. We closed today at 23,860, but I too understand how different that number is when coming down from 26,000 rather than moving up from 22,000.
While this rough patch will eventually pass, the damage done to the market will take time to repair and there will be no rush to move back in. We will approach re-entry just as we do with exiting our positions, unemotionally and methodically.