February 15, 2018
What We’re Reading This Week
It’s not over at Wells Fargo! Janet Yellen didn’t miss the opportunity to take one last shot at the big bank. I like to imagine she pulled a “Columbo” as she started to leave, turning around to say “Uhhhh, one more thing.”
Until Wells Fargo gets its act together, it will be placed on double secret probation. This means that for any two-quarter period, the bank’s average assets cannot exceed its total assets at the end of 2017.
This is great, as most bank sanctions come in the form of fines. These fines seem large to people like you and me, but are often not large enough for a big bank to notice. Limiting growth should really have the desired effect. Indeed, board members have been fired, deposit relationships curtailed, and CEO promises made.
In addition to the announcement, the Fed mailed the board a shaming letter. They probably deserved that. I have more sympathy for former CEO John Stumpf. Following the 2008 financial crisis Wells Fargo became one of the largest banks in the country. John Stumpf’s legacy has been almost erased because branch employees took it upon themselves to defraud bank customers. I agree that even the CEO should be held accountable, but it also feels…unrealistic…that he should be held this accountable. That’s probably why I haven’t been invited to work at the Fed.
I don’t usually write about the market here. Mostly just because it’s not fun to write about. The market is boring. Investors are exciting, and sometimes they interact with the market and that makes it interesting again.
For the past 12 months, the market has done nothing but climb. Really, volatility (lack of volatility?) reached levels below those leading up to the 2008 financial crisis in 2017. So, what do most investors do? People view the lack of volatility in the market as an “all clear” sign. Investors that once had respect for market declines ignore the voice in their head and want more. They invest money that they normally keep safe on the sidelines. They take on risk they shouldn’t accept.
We also can’t ignore the rise of exchange-traded funds and passive investment strategy. ETFs grew by an additional $500 billion in 2017. This money flow adds to low volatility and growth. Low volatility and growth leads to more money flow. It’s a cycle.
Then what happens? Well, like I said, the market is boring. It goes up and down. It “corrects.” I love that word. It implies that the market was “broken.”
“Hey, the market was doing too good! But don’t worry, we ‘corrected’ it!”
For investors, a correction is a 10% drop from a market high. We are there now, officially, and folks are freaking out! Will this slide into a “bear market” or put specifically, a 20% decline? It’s too early to tell. What we do know is that this is totally normal market behavior. Mostly.
The abnormal aspect of the market is the speed at which the market dropped. The S&P has never corrected in nine days or less. I’ve often stated that advancements in trading and investing only serve to make the market more efficient. As exchange-traded funds and leverage gain popularity and accessibility, the highs can get higher and the lows can get lower. The speed at which the market reaches those highs and lows increases, as well.
So, how about some good news? The market is still above its 200-day moving average, a sign that things are still relatively good. Yield curves are higher this week, and credit spreads are largely unchanged. The market has regained sanity! Unfortunately, most investors have lost theirs. This isn’t helped by the news media. As of writing this, CNBC posted a headline 17 hours ago that states, “What to do when the market tanks.” Tanks!?! A 10% correction following a year of straight profits is not tanking! The DOW is still up 14% over the past year!
Ok, I’ll be brief on this one. Let’s rewind to the end of last year. As of this writing, the market is pretty much where it was at the beginning of November. What was happening in the market? Analysts were worried! Most professionals agreed, we were seeing storm clouds form over the market. What was happening at Gainplan? We had recently removed exposure from the portfolio, and subsequently, did not participate in the market rise in November and December. We also saw storm clouds forming. Still, people wanted more growth! Despite warnings that markets were overvalued, geopolitical tensions were high, leverage was overutilized, etc. people wanted more exposure to the market.
In a vacuum, the market would have continued over a flat line from November to now. But remember when I said people interact with the market and it becomes interesting? Investors continued to funnel money into the market and it skyrocketed from November to the end of January. Exuberance reached a fever pitch and the market gave us another 12%. Then it took it back.
So, where are we today? People are nervous about the market. A few clients have reached out because they are concerned we have too much exposure! Pricewise, we are in the exact same position as November but the tone has changed. Why? In a rising market, people get greedy and in a falling market they get scared. Its emotional. Emotions and money do not mix well, it leads to bad decisions. Will the current sell-off lead to further declines? It’s possible. Will cooler heads prevail and steer the market out of a nosedive? I hope so. The best thing to do in an environment like this is to turn off the news, stop checking headlines, and engage in activity that brings you joy. Remind yourself that the market goes up, it goes down, it’s boring.
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