The New (Old) Normal

Markets are likely to continue to bounce around with greater volatility than we’ve seen for the past decade. We’re calling it the New Normal.  A return to markets of old.   

Fortunately, 2019 seems to be off to a good start as we’ve seen a rebound from a terrible month of December (which was the worst month for U.S. stocks since the 1930’s).  As of this writing (mid day Jan 25, 2019) the Dow Jones has risen about 7% from the year-end close – which is hopefully a sign of better days to come.

Last year was a terrible year for almost all asset classes.  While it is never enjoyable to see portfolios shrink year over year it is a good time to remind our clients that it is specifically during rough periods that your professional managers are able to find the deep discounts.  This is specifically what enables profitability during the next leg up.

When you think of it this way, it is counter-intuitive common sense. Do you want your portfolio manager to buy at a discount or do you want them buy at a premium?  Which one makes you the most money in the long run?

 

And herein lies the mental challenge for many investors.  Volatility and the fear it creates seems to have become the new normal.  And historically most investors tend to do the wrong thing during these periods.  So instead of increasing their investments when the news cries panic, they tend to want to wait it out and in doing so they miss out on the very best bargains.

Over the last 10 years, since the 2008 worldwide market correction, consumers everywhere have become comfortable with historically low-interest rates and a historically long consistent

“Bull” market which created an expectation of a relatively smooth ride and gains years over year.

Historically, however, this has just not been the trend.  Historically things have more typically been two (or three) steps forward and one backwards.  And the greatest profitability often comes after the worst pullbacks, just like it did after 2008.  

When looking at it in retrospect, the decade ending October 2018 appears to be the end of a rather unique period in history. One that allowed us to borrow more to buy more while also feeling comfortable with a historically calm and relatively smooth investor experience.

We believe we have now entered a long term period which will more closely represent the “Real Normal.”  It may take some time to get used to. And it may be uncomfortable but ultimately we feel it will be profitable as managers will be able to both buy undervalued investments in the dips and sell them as they become fully valued during the rallies.

The “Real Normal” will challenge most on the short term as we get back to a comfort level with it similar to the way we were comfortable with the financial landscape prior to 2008.

Over the long term, this should work out really well.