What is going on? Increased volatility and a tough environment are the story of the week


We think it is safe to say that volatility has returned to the markets and it has done so with a vengeance. The Dow Jones Industrial was up 700 points, down 800 points, then down again 600 points mid-day all in three trading days. Those are multiple hundred point moves! The markets were up 10% and then down 2% for a 12% move in 30 days. The media is buzzing about trade wars, tariffs and an impending recession. What does one think and where does one go? Many dreamily wish they owned more of the “market darlings,” but even the darlings (i.e. Apple, Facebook, Alphabet, Microsoft, Amazon, Netflix) of the market have taken a beating over the past few months!

As of 12/4/18, the S&P 500 price return was -7.24% in the past few months. The Dow Jones Industrial was -5.41% and the Nasdaq Composite was -11.0% during the same period.

When we think of conservative investments, our minds naturally go to bonds, but the broad bond market is down -3.65% YTD as measured by the iShares Aggregate Bond Index (AGG). Year to date, if one held a 50/50 portfolio of stock and bonds, the return would be -1.41%. If you then drew 7% off the portfolio, you would be down 8.41%. This is a tough market for retirees. Traditionally, the last few months of the year have been very good for the market, but instead the S&P 500 fell 7.34%.

According to CNBC.com, the S&P 500, Nasdaq and Russell 2000 were all officially in correction territory (again) Thursday morning – or more than 10% off their highs. Nearly half of the S&P 500 are in bear market territory – down 20% or more.  

Jamie Dimon, CEO of JPMorganChase, suggested the trade battle with China is behind this market volatility. Christine Lagarde of the International Monetary Fund said that “investor fears about recession seem ‘overdone.” Leon Cooperman, Omega Advisors chief and billionaire investor, said the SEC needs to investigate computer trading for the “Wild West” markets. 

So if bonds are down and stocks are down, where does one run to? It is a tough environment.  

What are our thoughts here at RB?  

• This too shall pass.  It is not historically normal for stocks and bonds to move in the same direction for long.  
• We believe recession is still a 2020 story or possibly even further away than that. We will continue to monitor this.  
• Earnings were very good for corporate America in Q3. Earnings have not rolled over yet.  

What Richmond Brothers’ clients can expect in the next 15 months

Some items we will have to wait on and monitor as the environment continues to develop and unfold. However, in general we have begun to remove some risk. You can expect a process of moving from individual companies to more index-based or broad-based holdings that remove individual company risk over time. From there, we can adjust the percentage of stock you own versus other asset classes based on your individual Riskalyze profile. You can be continually review your risk profile with your advisor andor your advisory team (Dan, Dave and Matt). As we move toward recession, we want to reduce the individual company risk and shift it to broad based market risk. Then as we get closer to recession we will reduce the overall amount of stock exposure. This is obviously a multiple step process. You have most likely already noticed the beginning of this process. We have sold some holdings over the past couple of months when they were at 52 week highs or near those highs. Sometimes this was skimming a gain and sometimes it was selling the entire holding.  These have been good/lucky decisions as the individual holdings have dropped more than the markets. The markets will come back over time. We will continue to do this and we are analyzing some sales in the next few days as a couple of holdings are near highs while the markets are off 6-10% in the past few months. So we would be selling high and buying low. 

In 2019 we expect to continue this process. As we find opportunity we will be transitioning portfolios to control risk and provide what we hope is a more comfortable client experience. In addition, as the holdings that have under-performed in 2018 bounce back or make progress in 2019, we will also include these in the transition process. Please make note that these are broad and general statements. Obviously we will talk with you on your reviews to understand how this applies to you. We still manage assets based upon your goals and your objectives. It isn’t one size fits all. We will tailor this experience to your risk tolerance and help give you the best chance to meet and exceed your objectives. We have talked about morphing portfolios to prepare for recession. Recession has pushed off from projections as early as 2017, then 2018, then 2019 and now 2020.  We will continue to monitor but the process to prepare you has begun. There is a plan and we are in the early stages of executing it for you.

We wanted you to know that in these wild and tumultuous times that we have a plan for you, based upon the financial plans we prepared together. As the environment changes, we will continue to update those plans and adjust as your goals, objectives and risk tolerance change. We will continue to talk with you and help you get from Plan A to Plan B. It certainly has been a challenging year. It isn’t over yet, so it may surge forward with a Santa Clause Rally, or it may fizzle. One doesn’t know in the short term. Either way, we have a plan and we will work with you to create the best outcome possible. 

At this time of season, we want to say thank you. We appreciate you being in our Richmond Brothers family and we give thanks for you and for our relationship. It’s easy on relationships when times are good but in challenging environments we know it is, well, a challenge. So we give thanks for your commitment to us and our relationship. We are working hard to deliver results for you in 2019 and beyond. May you all have a happy and healthy holiday season! Merry Christmas!  

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