InnOvation Capital & Management, LLC
IntelDigest
LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR
OCTOBER 17, 2018
Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues. Material may not be reproduced, forwarded or shared without express permission.
We will discuss the Markets in the next few issues of IntelDigest, as we have entered a particularly volatile period. You may recall that we have warned, on several occasions, that volatility would be high as the “Melt Up” in the equities markets plays through its final innings.
The “see-saw” action in the markets over the last ten days illustrates the point.
On Wednesday and Thursday of last week, the Dow Jones Industrial Average fell nearly 1,500 points. Some analysts attributed the downdraft to rising Treasury yields, as the 10-year Treasury broke out to a seven-year high and the 30-year Treasury reached its highest point in four years.
As safe U.S. Treasuries pay out higher interest yields, many investors may turn away from riskier equities.
Then, as the Third Quarter earnings season commenced at the beginning of this week, markets rebounded strongly. As earnings are announced over the next few weeks, we expect a series of positive earnings and sales reports to buoy the markets
The underlying earnings environment is quite strong, which is attributable to consumer and business confidence, as well as the business-friendly income tax changes passed by Congress last December. According to FactSet, the S&P 500 should post an annual earnings rate of 19.1% … and 7.3% annual sales growth … for 3Q.
But wait … over the last two days, the markets have given back those gains! Stocks have made a round trip, returning to levels close to the end of last week!
Volatility and Patience
In our last issue, we explored Behavioral Economics, including psychological biases involved in investor decision-making.
In today’s High-Volatility environment … at the perceived end of a very long bull market … investors can be confounded by the choice at hand: is it time to ride the Melt Up higher, or take money out of the market?
It is a time for Patience, yet, the urge to Act is very strong. This is Action Bias. We are not programmed to sit and wait; we want to Do Something.
Action Bias is as common in investing as in other areas of our lives. Sometimes, the best course of action is the hardest: Be Patient.
Volatility just exacerbates the condition. If the markets are moving up, should you take action to buy more? If the markets are sliding, and your portfolio contains “notional losses” (paper losses), should you take action to sell?
Intellectually, we know that wild swings … and additional corrections … are typical in late-stage bull markets. You must be prepared for much more volatility in the months ahead.
Counteracting Behavioral Biases
As we wrote in the last issue, investors must make themselves aware of the range of biases which may affect their decisions, and work to take a more Objective approach to their holdings, focus on Fundamentals, and Review performance regularly.
Keep records of your trades, including the rationale for purchasing each investment. By evaluating regularly, you can determine if an investment is underperforming its benchmarks, or no longer appropriate to your strategy.