What a week. The equity markets, both domestic and global, were decimated. The S&P 500 lost 5.8% over the past week (leaving it down 4.3% year-to-date). Emerging markets were hit extra hard losing a whopping 7.8% over the week while developed overseas markets followed suit with a –6.3% one week performance.
Investors now want to know whether it’s time to panic. Unfortunately, I can’t definitively provide an answer on whether it is or isn’t. In fact, no one can. Sure, you’ll hear the typical financial pundits on CNBC declare with exact certainty the direct cause of the selloff and how equities will perform over the short term. Some of the explanations as to the cause of the selloff will be correct, but the prognostications won’t. Just white noise in an overly uncertain world.
But what I can be certain of is this: the complexion of the market has changed. The price action of the equity markets has been as revealing as a slap in a face. The past week has brought a substantial amount of technical damage that must be dealt with no matter the cause of the market drubbing.
Don’t get me wrong, the cause of the selloff is important. It does matter, for example, whether the price decline resulted from just a healthy and normal correction (as equity markets don’t go straight up in a line, with the exception of the last, um, 6 years—part of the problem as it’s lulled investors into thinking this is the norm), or whether it’s fear of an increase in domestic interest rates, or major economic problems with China, or even worse, a beginning of a global recession. Each of these causes will bring a varied longer term set-up to the direction of the market. Time will reveal the direction, but for now we relied on the technical damage of the market as an indicator to pare back exposure to the equities.
Further technical damage to the market will beget further defensive posturing in an attempt to preserve as much capital as possible. Remember, as we have always managed money in corrections, the intent is not to take all exposure off. Overly timing the market is dangerous, but reducing risk on the margin is prudent. And if the correction proves to be short lived, we will be nimble enough to add equity exposure.
Here are links to some other articles about recent market developments:
- Five Hundo (TRB)
- Is the bull dead (BigPicture)
- This week’s market selloff may not be such a bad thing (NYT)
And as always, feel free to call or write with any questions or concerns.
Have a nice weekend!