The market has continued to demonstrate volatility this week, with two declines in the Dow Jones Industrial Average of more than 4% (more than 1000 points). While not particularly remarkable on a percentage basis, seeing those big numbers in the headlines certainly grabs your attention.
After an unusually strong and smooth 2017, it was inevitable that we would see a volatile correction work off the excess. This is something we have discussed a great deal. The fancy term is “mean regression” and it is what markets do. No surprises there.
The only questions were, when would the correction happen, how deep would it go, and should investors take any protective action.
We now know the answer to the first question and are waiting to learn the answer to the second.
For the third question about defensive measures, HCM follows a “weight of the evidence” approach when making tactical portfolio adjustments. Some observations include:
- Global central banks remain accommodative.
- Economic growth remains strong.
- Inflation is still relatively dormant in most economies.
- Earnings continue to beat expectations with increasing numbers of positive revisions.
- Long-term uptrends remain intact.
- Recent volatility has yet failed to send most of markets below their 200-day moving averages.
- Overbought conditions have been replaced by oversold conditions.
- Our technical indicators, while showing very short-term weakness still indicate markets are in long-term uptrends.
While volatility has raised worries that a bigger decline is underway, the ACWI (a global stock index) has dropped no lower than the levels seen at the end of 2017. It is still up 12% over the past year. If markets had simply hit those November or December levels and stayed flat for a few weeks, we would be talking about a well-deserved digestion period rather than Armageddon.
So, as far as protective action goes, we did take defensive action in January by making a slight reduction in equity risk in HCM’s Advance and Defend™ Portfolios.
Our conclusion is that the weight of the evidence does not currently support additional defensive tactics. In fact, we will likely begin to invest cash for clients that have idle reserves not required for their HCM Safety Net™.
In conclusion, to this point, HCM views the sell-off as a welcome development, correcting unhealthy excesses and potentially extending the life of the cyclical bull market.
As always, we appreciate the confidence you have shown in us. Please call your HCM Advisor with any questions.
Mike Hengehold (Mike@HengeholdCapital.com)
Casey Boland (Casey@HengeholdCapital.com)
Jake Butcher (Jake@HengeholdCapital.com)
Jim Eutsler (Jim@HengeholdCapital.com)
Greg Middendorf (Greg@HengeholdCapital.com)
Steve Hengehold (Steve@HengeholdCapital.com)
Doug Johnson (Doug@HengeholdCapital.com)