Third Quarter Review 2014

October 28, 2014

by Clark M. Blackman II

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The following is a letter to clients that readers may adapt for their own use.

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
So, Clark, what the heck is going on!?

So far, October is living up to its reputation as a tough month for the stock market and as a scary time for youngsters and adults alike.  The Ebola virus has found its way to the U.S., and terrorists are pressing toward Baghdad. There is significant civil unrest in Hong Kong, a Chinese economic slowdown, growing economic malaise in Europe, and the apparent Russian invasion of the Ukraine.  What else could possibly go wrong?  Oh, if you are in Texas, the price of oil is falling from over $100 a bbl toward less than $80 [Ouch!].

I know this is a very negative way to start off a client newsletter, but look at the recent headlines: “Wall Street Runs Scared;” “Dow Suffers Biggest Loss of 2014;” “Dow Erases Gains for the Year;” “Market Tumult Squeezes Big Banks;” “Oil, Europe, Ebola Spook the Markets;” “Risk of Deflation Feeds Global Fears.” As one client joked, these global issues could lead one to “put a gun to one’s head” (at least, I assume he was joking!).

I’d like to briefly address some of this hysteria.  First, these are not harbingers of a long-term systemic downturn or a bear market.  The markets will always react to new and uncertain situations with trepidation and fear, and speculators will always react quickly in the short term to try to get ahead of the dreaded stampede.  Of course the gamble for them is that there is no stampede, but unfortunately they could instigate a bit of herd mentality if enough investors follow their lead.

Remember, like I always say, it’s not the decision to get out that’s difficult; it’s the decision to get back in!  Ask anyone who bailed out at the end of 2008 and the beginning of 2009 how well their gold, bonds, and money market funds have done these past 5 years versus the market.  They’re still waiting for a signal, a sign, an omen to get back in.  Maybe this downturn is it. Who knows?

It is the goal of the news to sell advertising. More people read and watch scary news than happy news.  Knowing that, the intelligent long-term investor takes every bit of frightening news with a grain of salt.  The U.S. economy continues to muddle along.  Yes, consumer spending was off in September, down -0.1%.  But the expectation was only +0.1%.  This difference is a rounding error. No smart economist or investor would panic over this, especially given that August “back-to-school” spending disappears in September.  Knowing how economic statistics are estimated, I am serious when I say the numbers are essentially equivalent. The difference can easily be attributed to rounding and flaws in data collection.

The idea that lower oil prices are bad for the economy is a bit funny.  True, they can be an indicator that demand is slowing, especially if supplies were steady or falling. But we know that supplies are growing dramatically. It was just a matter of time before the prices began to fall accordingly.  Lower oil prices may be bad for the up-stream operations of oil companies, but they are pretty good for virtually everyone else.

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