Your Price Of Admission
Equities start the day sharply lower as you pay your price of admission to the equity market. Let’s circle back to that thought in a second but first let’s look at the lay of the land. August is off to a terrible start for a couple of reasons. First, we were up nearly 21% at the end of July based solely off multiple expansion (earnings have done very little this year). When a market is up dramatically off valuation alone, it can reach a fragile state. Second, we had that really odd Fed meeting where Powell muddied the waters on rate cuts. Finally, and this is the big one, China vs the US escalated. We raised tariffs and they responded by weakening their currency and potentially banning US ag imports. The last time China devalued the Yuan global markets shook and the Dow opened down a 1,000 points so yea…volatility could be with us for a while. That being said, the market is up 39% since then so let’s circle back to my intro. Selloffs, losses, nervousness, doubt, these are the COSTS of equity returns. You accept these risks because you know that nothing is free in life, especially not stock returns. This one of Morgan Housel’s best articles, I adore it, everyone should read it (especially advisors). I’ll let him have the final word: “Returns are never free. They demand you pay a price, like any other product. And since market returns can be not just great but sensational over time, the fee is high. Declines, crashes, panics, manias, recessions, depressions. The trick is convincing yourself that the fee is worth it. That, I think, is the only way to deal with volatility; not just putting up with it, but realizing that it’s an admission fee worth paying.”
After the open it was a full blown, sell everything not bolted down, my entire screen looked like the elevator scene from The Shining intraday puke fest. Down 2.5% in only a few hours as babies and bathwater were summarily tossed. You hear it all the time but “stairs up, elevator down” continues to be the best description of stock market selloffs. It took all of six trading sessions for the S&P500 to drop 6% and while equities quaked bond yields plummeted with the 10yr note hitting 1.73%. Here’s a tidbit for all of you super smart savvy investors playing at home: The S&P500 div yield is now above the 10yr Yield (2% vs 1.73%). The last time that happened? 2016. Anyway, it’s silly to say “markets hate uncertainty” but when you see this sharp of a selloff it’s clear that something wasn’t priced in correctly (trade war escalation). What were the biggest losers? Everything. Were there any winners? TSN rose 5% to a new all-time high. Tell you what, when I’m feeling down there’s a couple of things that will automatically cheer me up: my family, Disney, 1986 Lynch Bages, and a hearty portion of chicken tenders with ranch. Get ‘em Tyson!
We closed down 3% on what was one of the worst single days in the past 5 years. Rough one boys and girls. My friend Charlie Bilello has a really cool chart I want you to see. Click that link and then come back. You’re back? Great, then you’ve seen that selloffs are PART of how markets work so the sooner you accept that the better. All of those events you just glanced at seemed like the end of the world and yet here we are, alive and kicking. There’s a term in finance called the “equity risk premium” which simply states that stocks have higher returns than cash because they are riskier. You earn that excess return on days like today and all the other selloffs to come because even though you walk thru the valley of the shadow of death, you will fear no evil. This is what it takes to be a good long term investor and that will NEVER change.
Final Score: Dow -2.9%, S&P500 -3%, Nasdaq -3.4%, Rusk -3%
We’re gonna skip to the big finish because, frankly, we could use a laugh or two
The first video is a young Jedi learning the extent of his powers. Wait for it…
The second video shows what happens when you don’t think your plan all the way thru. Honestly what was their plan?
Have a good night.