Wild market ride creating entry points for long-term investors

Volatility is a reminder to investors that markets move in both directions

Aug 26, 2015 @ 1:56 pm

By Jeff Benjamin

The stock market roller-coaster ride showed some signs of relative calm Wednesday, but not all market watchers are ready to claim the worst is over.

“It feels like I'm in an Indiana Jones movie when you just get through the snake pit only to find a boulder coming at you from a different direction,” said Bob Rice, chief investment strategist at Tangent Capital.

Citing Wednesday morning's strong start for the S&P 500 Index, which mirrored a strong start Tuesday only to be followed by a market-closing decline, Mr. Rice added that “today looks just like yesterday before the trap door opened at 3:15.”

“In a world dominated by central bankers, politicians and prognosticators, it's difficult to make predictions about the financial markets,” he said. “That's why I'm taking a very hyper-diversified approach to portfolios, not only across asset classes and strategies but also across geographies.”

Mr. Rice is less interested in what caused the sudden spike in stock market volatility than he is in navigating markets from here, and that's the attitude he thinks all financial advisers and investors should be embracing.

For context, he cites the Shiller price-to-earnings ratio with a long-term historical average of 16.

In the era since the financial crisis when the Federal Reserve has been creating cheap money, that same PE ratio has averaged 24.

MARKET AT NORMAL LEVELS

“In the era of cheap money, the stock market is now back to normal levels,” Mr. Rice said. “The stock market might chill out from here, but this is probably what a Fed-supported market looks like.”

With the S&P 500 up about 1.5% through the first half of trading Wednesday, in the wake of a six-day losing streak, Kenneth Kim, chief financial strategist at EQIS Capital, was claiming “I told you so.”

“I said on Monday that this thing was going to bounce back quickly,” he said. “Right now the market is pinning it all on China, but that focus is misplaced and misunderstood.”

Like Mr. Rice, Mr. Kim believes the U.S. stock market is just going through a normal correction cycle, which is not the same as the financial crisis that was caused by deeper financial problems related to housing and credit.

“Look around our economy and you'll see that nothing has been exposed that we didn't know about a week ago,” Mr. Kim said. “There's nothing to indicate that a large market downturn is justified, that's why I'm still bullish on stocks and I think we're back on course.”

He compared the recent market turmoil to October 1987, when a sudden market drop included a 22% decline in one day.

“Just like now, in 1987 there was nothing wrong with the real economy,” Mr. Kim said. “And within about 18 months, the stock market was above where it was before it crashed in October 1987.”

J. Brent Burns, president of Asset Dedication, won't speculate on whether market volatility is coming to an end, but he does think investors have become complacent about the lack of volatility over the past few years.

“It's been a while since we've seen the markets go down, and people forgot that markets do go down,” he said. “People have to remember that it's just part of the show.”

RINSE AND REPEAT

That show, he added, includes a stock market pullback on average about every four years.

“What we're seeing now is just another rinse and repeat cycle,” Mr. Burns said. “This is not a 2008-like structural breakdown, and we're not seeing an additional slide because of something like 9/11, or any other exogenous factors that really shake people's confidence.”

The case for just sitting tight, or even buying into the stock market, are stronger than they have been in a while, according to Paul Schatz, president of Heritage Capital.

“This is exactly how markets bottom,” he said. “Not only do I think the Dow is going back to all-time highs, but I think it is heading toward 20,000.”

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