Bernanke Spoke...and financial markets hated what he had to say.
Federal Reserve Chairman, Ben Bernanke, spoke today. The markets didn't digest the news too well, which ironically, was that nothing was really changing this month. Normally, when stocks drop, something else is a benefactor - bonds, gold, etc. Today, nothing benefited. Everything went down. To add insult to injury, this selloff is really a continuation of market reactions from May 21. On that day Bernanke also spoke, and everything went down. Since then the great market rally that started late in 2012 is finally losing steam, and potentially signaling a larger correction is looming.
Below is a chart that shows the four major asset classes for the past year (stocks, bonds, real estate, and commodities - identified by gold):
Stocks have actually held up the best, but it's easy to see why diversified investors are only up mid single digits over the past 12 months. That said, stocks could also have the farthest to fall from here. It's critical not to abandon Nobel Prize winning, scientifically proven, and academically heralded investment research in times like these - a la' not using highly diversified investment portfolios.
Even the Balanced Tactical Asset Allocation model I share on this blog (rooted in academic research with a little twist of extreme geekery added) has been bobbling around a bit as of late. The trailing 12 month return is still over 7%, but it is down about 2.5% over the past month.
Is There a Safe Place to Wait out the Storm?
I'm often asked this question. Truth is, some waters will be less choppy, but it will be choppy no matter what. With bond yields still near historic lows, the monthly interest payments of a bond portfolio cannot smooth out the daily volatility (of bonds themselves, much less stock and commodities). Sometimes gold is a safe haven, but given it's down about 18% the past 12 months and 30% from its peak, I don't think many would call it a safe haven at the moment.
The best medicine, is the most cliche advice given by financial advisors:
Don't panic, stay committed, invest for the long term.
Yes, I know, some of you (both clients and non-client blog followers) are retired. It doesn't mean, however, that you can't have a time horizon of 12 months or longer. A very well diversified, conservative portfolio, can still have small drawdowns. A few percent seems like a massive failure, but looking big picture, it means very little. It's the big, nasty, 20% to 40% drops that investors need to avoid. And while it might seem like after a 2-3% drop the end is near, it really isn't.
At this point there's still a high likelihood of a natural correction for the stock market. I've pointed that out for the past few weeks via market update videos. Bonds, real estate, and gold; are a little more difficult to forecast. They're all trending down, and largely it's more Federal Reserve influenced than anything else.
As a result, the tactical moves our portfolios have made are to be very defensive on bonds (primarily using very short term US Treasury bills), very limited exposure to gold, and leaning more towards stocks than real estate.
The next few weeks should be quite revealing. If the stock market can't get back into its former uptrend, it's likely to correct 8-10% before having a chance to find its footing. I don't think bonds will fall dramatically from here, mostly because the Fed will not be raising interest rates and is continuing its bond buying QE3 program. I will keep an extra close eye on the markets however, and be sure to report what's happening and how to best handle the gyrations here on my blog.
Market Have You Shook-up?
If you have questions or concerns - feel free to reach out. If you're a client, just give me a call or send an email. If you're not a client, but still need a little feedback/direction; feel free to use the contact form on my blog and I'll get back to you via email. It's never as bad as it seems, but now is a very good time to be a little extra cautious.