Bring me that old book, would you?

Ancients Books Of The 14th Century In Library

Today was a historic day for the markets.  We felt a little context might be helpful so we blew some figurative dust off old tomes in the Monarch archives to better put things in perspective.

In terms of gut-wrenching daily market drops days like today really don’t stack up from a historical perspective.  Many of the really big ones were in 1899, 1907, 1929, 1932 and of course the granddaddy of them all October 19, 1987 when the Dow dropped 22.61% in a single day.  “Black Friday” as it has become known was so bad in fact that we tend to overlook what happened the following Friday October 26th, 1987 when the market dropped 8.04%.  Today’s selloff while historic in terms of points probably won’t be remembered as a particularly noteworthy day in years to come.  As indices underlying value tends to grow over time measuring moves by “points” becomes less meaningful.  How do Friday and today really stack up?  First a quick comparison to one of a few really bad days in 2008.

December 1, 2008.  Everyone knew it was going to be a bad day.  The last market close showed the Dow at 8,829.04 but it was certainly going to be lower at the open.  A lot lower.  When it was all said and done the market closed at 8.149.09.  A loss for the day of 679.95 points.  Expressed in percentages which is really the way we ought to be thinking about indices the market dropped 7.70% that day.  In terms of points it is the 4th largest daily decline on record.  In terms of percentages it was the 12th largest daily decline.

February 2, 2018.  It was Friday and it had been a lousy week.  It wasn’t a foregone conclusion the market was going to close substantially lower.  Quite the contrary in fact.  The new buzz word on Wall Street is FOMO (fear of missing out) and investors with money on the sidelines have been buying dips all the way up.  Envious of gains others had been making while personally “sitting out” investors have been buoying the market any time there was a hint of a lower close.  Friday morning there was every reason to believe the party-crashers would arrive on que.  However at the end of the day the market was down 665.75 points.  Friday’s market drop would make it the 6th largest daily drop by points in history.  Interestingly as a percentage daily pullback of 2.54% it doesn’t even make the list.  That’s because while uncomfortable 2% daily pullbacks are fairly common across the years. They don’t themselves really signify anything.  They occur within bull markets, bear markets and sideways markets.  They may herald the death of a bull market, or exist within one as just part of normal ongoing aberrations or corrections. 

February 5, 2018 (today).  It’s a Monday and the pre-market futures looked ugly.  The vibe on the street is that the market has gone up too far, too fast without a healthy pause or two along the way.  There’s a feeling that we need a correction and perhaps after Friday’s down day this is it.  We are of the opinion that many investors have not only been expecting one but hoping for one so we could resume moving higher.  After a wild ride all day long the Dow finally closed down 1,175.21 points, or 4.60%.  Today’s point loss will be far and away the largest point drop ever for the Dow (the second being a distant 777.68 points on September 29th, 2008).  However again expressed in percentages today’s selloff doesn’t make the top 20 list.  While our data doesn’t go beyond the top twenty we do know the twentieth worst day on record expressed in percentages was down 6.98%.  As such it’s fair to say that today’s negative 4.60% is pretty far back in the worst days on record.

We all understand why this is, of course.  Because losing 733 points when the Dow is at 9,310 (as on October 15th 2008) is significantly worse than losing 1,175 points when the Dow is at 25,400.  At this point we advise not adjusting sentiment or allocations.  Given our extremely market-friendly environment it’s unlikely that the bull market is over. 

So what’s behind the selloff?  It appears two things have spooked the market.  Point One: sharply rising interest rates.  Make no mistake rates are still historically very low.  Still, rising interest rates would be bad for consumers and companies.  The argument goes that current stock market valuations are so high that anything that erodes corporate profitability will be met with swift punishment to stock prices.  Higher interest rates might well be the thing that forces the market to bring multiples (defined as the number when multiplied by a company’s annual profits equals the share price) down. For example if a company’s annual profits are $7.00 per outstanding share and the stock is trading at $70.00, then the multiplier is 10.  The higher the multiplier the higher the share price and vice versa.  Generally speaking the better the future outlook the higher multiples companies will enjoy.  On the other hand, if the future looks less promising for some reason (rising interest rates perhaps) multiples drop and so do share prices.

Point Two: the other issue weighing on investors is the uncertainty of the new Fed Chair.  It’s been said many different ways but there’s an old saw “Bull markets don’t die of old age, they’re killed by central banks.”  If the new Fed aggressively raises interest rates in an effort to combat inflation, well… see Point One.

In our view this is not 2008 all over again.  We are currently back to market levels not seen since….. December?  That’s correct.  We’re back to where we were two months back and that certainly isn’t unusual.  Could we be on our way significantly and painfully lower levels?  It is possible but very, very unlikely. 

Here’s a hypothetical for you.  Let’s agree that Warren Buffett doesn’t invest because he wants to inflate his personal wealth.  He is a man that wants to provide superior returns for his shareholders.  I’m of the opinion he dislikes losing a dollar just as much as any other investor.  Given the past two market days do you think Mr. Buffett is more inclined to buy or sell? 


As always, please feel welcome to reach out to me personally if you would like to discuss in greater detail.

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