US Stock Market Trending Down*
Canadian Stk Mkt Trending Down
US Bond Yields Yield’s Trending Down
Jeff’s Weekly Stock Market Commentary:
My family and I just went to Dollywood yesterday and I greatly enjoyed riding the roller coasters with my kids.
The plunges, twists and turns are exhilarating and make me feel alive. But as I looked around at the other people waiting in line, I didn’t see too many retirees.
It seems roller coasters are a ‘younger’ person’s pursuit. And, based on how sore I am this morning, I understand why!
I now sport a bruise on the side of my head from our last ride of the night. My 18 year old daughter and I were waving our hands up in the air at 55 mph through twists and turns…at night…and an unexpected sharp left turn resulted in her elbowing me in the side of my head. I don’t quite remember what happened after that…
The last market commentary included a picture of a waterfall event in the S&P 500 index that occurred on December 12, 2014. I used that picture to illustrate the risk then present in equities and how the volume (number of shares traded) is much higher on the down moves than the up moves. In that commentary, I said that I continue to favor U.S. Treasury Bonds (TLT, EDV) over equities at this time and that I’m perfectly comfortable avoiding equities.
Since then, the equity markets have rallied back to all time highs! Since I showed a chart of the decline, I thought I should show the recovery. You can see that the decline in the S&P 500 index started on December 8th and bottomed out on December 16th.
The decline was right at 5%. From there it shot off the bottom like a rocket and recovered 7 days of losses in just 3 sessions. It was one of the strongest 2-day rallies we’ve seen in years, recovering 5.3% in 3 days.
For those of you keeping score, the S&P 500 index is now up year-to-date 12.45% as of last night (12/21). The Russell 2000 growth index is up 3.28%.
Meanwhile, the boring bond trade that I have been advocating for months and months (iShares Barclays 20+ Yr Treas.Bond (TLT)) is up 23.74%. Yes, you are reading that correct: the ‘boring’ 20+ Yr U. S. Treasury Bond index is up almost double the amazing return of the S&P 500!
The Wall Street System wants you to focus on growth, but if you are retired or near retirement like my clients, then you realize that your number one priority must be avoiding significant losses.
Once you are retired and are no longer contributing to your retirement funds then the greatest risk you face is losing 20% or more of what has taken you years to accumulate. In other words, the risk associated with earning a return matters.
So let’s take a look a why I am currently favoring ‘boring’ bonds. In this first chart I am comparing the S&P 500 index (red line) with the iShares Barclays 20+ Yr Treas.Bond (TLT) (blue line) over a year-to-date timeframe.
Notice that since the beginning of the year that red line dropped below the 0% return level at least 3 times before it gathered some momentum in the middle of April. Then it retreated back in October and barely remained in positive territory before surging to new highs. Then it lost over 5% in early December and recovered in 3 days.
The ‘ride’ associated with the S&P 500 index this year feels a lot like the ThunderHead roller coaster that what my kids and I rode several times yesterday (that’s not us, but it is the same roller coaster).
I don’t think that’s what my client’s are looking for when it comes to investing their nest egg—the money that will determine their quality of lifestyle and their ability to remain retired!
On the other hand, the blue line representing the bonds is much more appealing to them. Notice that it moved into positive territory right at the start of the year and never once approached the 0% return line again.
Also notice that it seemed to surge when the stock market plunged while maintaining its gains when the stock market recovered.
I am not saying that retirees should only be invested in bonds. I AM saying that it is about RISK-ADJUSTED RETURNS. Risk adjusted means taking into account the ups and downs of the journey.
Let me be clear—I am an equity investor and had over 70 stock positions just months ago, but the risk associated with equities right now does not make sense to me. This is the first time since 2008 that
I have not held equities in the accounts I manage and it is because the inherent risk of a significant correction is simple too great to ignore.
In other words, based on research and probabilities, I feel that bonds provide a better risk-adjusted return right now. I also feel that the risk associated with equities is significant and that we can experience another 5-10% drop at any time.
All that may change over the coming weeks or months and as the data and the risk metrics change, so will what I invest in. Until then, I’ll get my thrills on a trip to Dollywood as opposed to putting my client’s hard-earned retirement money into the roller coaster stock market.
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