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Nasty Bears Put the Hurt on Goldilocks | Keeping Your Head Attached When Those Around You Are Losing Theirs

As the story goes, the bears have returned to find Goldilocks in their bed. It is important to note that even though they scare the poor girl to death, the bear’s growl is worse than its bite. Goldilocks kept her cool, ran home, and the story had a happy ending. What most people don’t remember is that by the time Goldilocks was confronted by the bears, she was well fed and had a nice long nap. The moral of the story here is that even though the bears scared the stuffing out of Goldilocks they did not hurt her.

Over the last few days the markets have been crushed down over 10%. The sentiment in the equity markets have turned from extreme greed to extreme fear in a period of a few days. For the last two years there has been a complete absence of fear. Markets have slowly climbed the “wall of worry” as investors bid up stock prices to post-recession highs. History tells us that markets need a correction to flush out the weak players and keep excesses in check. When that doesn’t happen for a long period of time, an “air pocket” of sorts forms that results in a panic scramble like we are experiencing now. The emotion of fear is much stronger than the emotion of greed, thus the reason for markets falling much faster than they go up.

Adding to the problem is likely the rivers of money that have flowed into the markets through passive instruments as well as through so-called “robo” advisors. The recent move away from using a human financial advisory in favor of a “cheaper” algorithm is that the latter fails to help the investor separate their emotion from their money. In times of panic, un-coached investors will not wait long to bail from the markets as fear takes over any sense of good judgement. They forget in an instant all of the reasons they invested in the first place. They drop their discipline faster than Superman can scale a skyscraper. Unfortunately, many will suffer the plight of the neophyte, buying high and selling low. Passive money goes both ways, but the velocity of the outflow is likely to dwarf the inflow.

Bull markets usually end as the business cycle moves from expansion to contraction. We do not see any sign of contraction. On the contrary we see expansion gaining momentum. We see earnings growth domestically and globally. This is not the neighborhood where we normally see the “boogey man.” This is more likely a pause in the market to rid it of weak players and concentration of risk. 

What we see here is many folks who are being caught “off sides” in the markets. People who underestimate risk are now being forced by the markets to unwind positions. This is an ugly and dangerous process; but a process that we believe will likely end very soon. The best way to avoid being hurt is to stay on the sidelines. We believe the worst thing to do is to give in to panic and sell. History teaches us over and over that these periods are not the times to sell. Rather, it tells us that generally it is a time to buy.

The market bear that has reared its ugly head will growl loudly enough to menace the neighborhood but likely will tire soon. The fundamentals will reappear on the horizon and investors will be stuck with the actions or inactions they took during this time of fear. We believe it is more likely that this bear will return to hibernation soon leaving the steadfast investor intact. As for Goldilocks, at least she was well fed and rested before she chose to cut and run.

 

CRN: 2018-0202-6395 R 

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.

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Effective, June 10, 2016, please note that Gene Peroni left Advisors Asset Management (AAM) to become President of Peroni Portfolio Advisors, Inc. Peroni Portfolio Advisors, Inc. ("PPA") is an investment advisor independent of AAM.