A Terrible Investing Week - Why and What Happens Next?
Last week I published a market update video just after noon eastern time. At that moment, the market was down slightly, but not by a lot. The last few hours though, the stock market tanked. After the dust settled, it was a 200+ point decline for the Dow Jones Industrial Average, and nearly a 1.5% drop for the S&P 500. For the week those stock indexes finished down over 2%.
On the surface, this might not seem like a huge deal. But after weekly gains for what seems like forever, it's hard to stomach back to back poor weeks. The S&P 500, for example, has been up 16 of the past 22 weeks. Until the past two weeks, it hadn't had back to back losing weeks since early November of 2012.
That's quite the rally.
For those that work better visually, here's a recap of the rally the market has experienced as of late, along with a few notations:
This week could prove to be quite important. We should see if the market can bounce off the support of the uptrend, of fail and start a more sizable correction. It's been pretty resilient for a long time, but eventually this trend will be broken.
Last Week Stunk - For Conservative, Balanced, and Aggressive Investors Alike
Normally when the stock market falters (as it did last week), bond investors stay nice and steady. This wasn't true last week. The news from Federal Reserve Chairman, Ben Bernanke, has really spooked the bond market.
For those that missed Bernanke's comments, he hinted the Fed would slow it's quantitative easing program sometime this year. If that happens, the Fed will stop buying about $75 billion worth of bonds each month. When a big bond buyer steps out of the bond market, bond prices fall, and interest rates rise.
In the short term this hurts bond investors. In the long run, it helps them significantly. Think of it this way - you can either get 2% per year for 2 years; or, you get 0% this year, but 4% every year thereafter.
See, in the short term it hurts, but everyone will be much better off getting higher interest rates down the road. The only way for this to happen is for the Fed to get out of the bond buying business.
As a result of both stocks and bonds (and real estate and commodities) all dropping last week - it didn't matter how an investor was invested. Everything went down. The drops weren't huge, and investors should still have nice YTD gains, but nobody likes a bad week.
Here's a chart that shows last weeks returns of the four major investment types:
Since the chart doesn't have a great built in legend, here's what those lines/symbols are:
VNQ - Red - Real Estate BND - Yellow - Bonds GLD - Green - Gold S&P 500 is in blue
Losses ranging from 0.51% to 5.40%. Ouch!
Should we panic and sell everything right now?
Of course not. Financial markets have been really good for the past few years, and fantastic the past 7 months. All good things eventually come to an end. Having a conservative, balanced portfolio will have its share of ups and downs - though they should generally be muted compared to aggressive portfolios.
It might be wise to trim back some risk assets and enjoy locking in the gains (as my firm is doing), but not so smart to just wholesale bail out of all investments.
I'll keep a close eye on the markets this week as I do believe it will tell us a lot. If there's any breaking news, I'll be sure to share it here.