It’s never feels good to lose money. Never. However, when investing in stocks, there will be periods that we do lose money. Let me repeat that. There WILL be periods that we lose money. You can’t be invested in equities without going through times where stocks give back some of their gains.
The question then becomes, “How much of those gains will be given back?” We do realize that the two recent bear markets in 2000 and 2008 are still fresh on people’s minds. So anytime the market goes into correction mode, it is natural to ask the question, “Is this another bear market again?” To correctly answer that question, we have to look at the weight of evidence instead of how we are feeling during this correction.
1) A less # of stocks are participating in this recent advance (a bad thing)
The chart below shows that only the biggest stocks in the S&P 500 are moving higher. The smaller size companies in that large cap index are underperforming. Small cap stocks are also very much underperforming large cap as well.
2) Credit spreads have contracted (a good thing)
This simply means that money is finding its way into more risky investments in the short term. When credit investors embrace risk, the stock market usually benefits.
3) Strong Dollar (a bad thing)
This is bad for the stock market for multiple reasons:
Foreign countries with dollar denominated debt suffer and multinational companies that either export or have operation overseas suffer.
4) Seasonality (a good thing)
The stock market is entering the best two months (November & December) of the year.
We don’t predict the future at Lakeview Capital Partners. We simply look to the current weight of evidence to determine how we are exposed to the market. At this point, we still maintain that this is only a correction and the market will continue to move higher. That being said, we do recognize the current challenges and obstacles we face. Everyone loves a rising tide that lifts all boats. While we are not experiencing that today, we still believe in the near term the path of least resistance is higher.
Past performance is no guarantee of future results.
Source: Brian Boughner, CFA, CMT