2nd Quarter 2013
July 1. 2013
As the second quarter comes to an end, we are reminded rather quickly that summer is upon us. The heat and humidity in much of the country mirrors that of the equity markets over the last few weeks. It is a stark contrast to the “melt up” we saw during the first quarter, when the market could do no wrong. It never ceases to amaze me how quickly sentiment can change.
One concept you have probably heard many times is “buy low and sell high.” It is one of the oldest phrases in the investment world that is simple yet very difficult for many people to execute. Let me explain why I say that: during the 2008-2009 financial crises, we saw redemptions from equity funds hit record highs, not when the Dow was at 14,000 but after it dropped over 50%, down to the 7000 level. This redemption of equity funds continued all through 2010, 2011, and even into 2012. Instead of buying low, people were selling low. Fast forward to 2013, and we have exactly the opposite scenario. Investors are buying equities as the Dow sets an all-time high of 15,000; we call this investing the “buy high and sell low” strategy. It is a portfolio that is run based on the emotion of “I don’t want to miss out on the rally” when the market is up and “it is going to zero” when the market is down. At Waterway Wealth Management, our goal is to keep people in the market at the level of risk they are comfortable with and then buy a little when the market drops or trim a little when it runs up. If you had a chance to read the last blog, then you know we have been trimming this year.
At the time of writing this newsletter, the market has come down from its peak by about 6%, which still leaves it up about 10% for the year. Federal Reserve Chairman Bernanke’s comments this past week, regarding the bond buying program known as QE, rattled the markets. We have been skeptical that the current pace of bond buying is having much of an impact on economic growth, and we feel the economy is not growing fast enough to support this recent stock market run. The area where this is most evident is corporate earnings. If you look back to the beginning of the year, the projected earnings growth rate over the next twelve months on the S&P 500 was over 30%. Those numbers are coming down and are now near 20%, which is still too high, but they are moving in the right direction. Although valuations were not terribly high, a selloff will bring PE ratios down and actually make the market more reasonably priced. In any given year, the market on the average will correct about 13%. While it is possible we will see that level of correction, we are unsure it will happen. But, with that said, we are prepared to take advantage of any opportunity that allows us to buy equities at a fair price.
This fall, we will be rolling out the Waterway Account Portal for online access to your current and archived quarterly statements and account values from anywhere you have an internet connection. We have continued to invest in technology, because this delivery is more secure than paper or email. We appreciate your willingness to give it a try.
We welcome your questions and hope you stay cool this summer both physically and mentally as the markets heat up.
Have a safe and enjoyable summer!
Dan Michalk CFP®,ChFC