”Buy low and sell high. It’s pretty simple. The problem is knowing whats low and whats high” (Jim Rogers)So after months of upward momentum, finally the bears have come out from whatever they were doing in the woods shouting “I told you so” as results across the board for February were negative as follows:
Dow Jones -4.3% +1.3%
Nasdaq -2.4% +4.8%
FTSE -4.0% -5.9%
Nikkei -6.7% -4.2%
SSE -5.8% -1.5%
Dax -5.7% -3.7%
On the currencies, with the hawkish views of the new Chair Fed Jerome Powell we saw the dollar begin to strengthen again, most notably yesterday when Jerry hinted we might get four rate rises this year instead of three….
GBP +3.1% -1.6%
EUR +1.6 -1.7%
JPY -2.6% -5.3%
AUD +3.6% +1.0%
CNY +0.7% -2.6%
So what is the root cause of the the drop and the volatility we have seen in February? One word interest rates.
When the Dow Jones suffered its “biggest fall in history” on 5th February, all the media outlets were quick to jump on this , sensationalise / scare. There was a market sell off, its that simple. There was talk of the 10 year treasury surpassing 3%, more interest rate rises in the US and I guess some fears about valuation in certain sectors (most tech funds had made 40 – 50% returns in the preceding 12 months so why not sell and take some profit). I have been doing this all the time as I hope you have.
But again to put this “biggest fall in history” into perspective, it was due to the shear strength of the market as to why it was the “biggest”. That day the Dow fell 1597 points which was a fall of 6.2%. In August 2015, in one day the Dow fell 6.6% but yet that only equated to a 1089 points drop….shows how far we have come.
By the way all of those losses had been recovered by close of play on the 7th February so a full 48 hours for sense to go back into the markets and traders buying the dip…..far from the financial crisis many annoying media outlets would have you believe.
Interest rate rises happen because the economy continues to strengthen. US unemployment has fallen continuously since 2009 when it peaked at 10% to now where it is at 4.1%. This means we are finally seeing some inflation, so the Fed have to react to this. But in reality, good luck finding anything better than 1% unless you want your funds tied up for considerable periods of time on cash.
And this is only the US Dollar , the Euro and British pound have no reason to rise their rates. Well invested funds have averaged over 20% per annum in the last five years. Whilst we cannot expect this level to continue forever, the companies themselves certainly believe the bull market is here to stay.
This year Goldman Sachs noted that there has been record share buybacks from companies, US$177 Billion so far. Don’s tax cuts will also inject a further US$1.4 trillion into these companies.
Nobody ever likes to see the value of their portfolio fall, even if it is in the very short term but if you want a return on your money, well managed funds owning good companies is the way to go. Whist I’m not sure we can continue at 20% (and I hope we have all loved every minute of these returns) , 10% per annum I think is achievable.
So for me , having money in cash / treasuries , which may pay me approximately 2% per annum over the next 10 years is simply not even an option to consider…though I guess for some it is…..