The Strangest Correction
- What a difference one quarter makes. Last October we said that we expected a sizeable correction in the market and lo and behold, we got one.
- Now in our fourth decade of professionally managing portfolios and having been through corrections and bear markets many times over those decades (1987, 1991, 1994, 1998, 2001-2, 2008-9, just to name the big ones), we can safely say this was one of the strangest.
- As broad-based and strong of a rally as we saw in the first nine months of 2018, we saw an equally broad-based sell-off that began in September and continued on through Christmas Eve day, culminating in the worst Christmas Eve stock market performance ever, and ultimately, the worst December performance since 1931.
- One would think that something big like world war, world-wide famine, massive weather events across the globe, or a global disease plague had engulfed all the nations of the world, all at the same time. Nothing of the sort occurred.
- Instead, the Federal Reserve raised the Federal Funds target rate from a range of 2.00%-to-2.25% to 2.25%-to-2.50%, the third quarter earnings season was solid against increasingly difficult previous-year comparisons, and the fear of higher tariffs on imported Chinese goods were considered the culprits.
- Another aspect of this correction (that would not have been obvious to the average investor) is the extremely low volume which accompanied this setback.
- Typically, when something very impactful is happening in the markets, at some point volume swells and then a “capitulation” happens (or the proverbial “throwing in of the towel”), typified by high volumes.
- At least in our portfolio, we observed very low levels of volume in most of our companies. And that low volume trended lower as the correction got more severe, which is exactly the opposite of what one might expect.
- We cannot arrive at a definitive answer as to why that was the case this time, except to say that there was a classic “buyer’s strike” happening.
- But we are not willing to say that was the only reason and continue to seek out further explanation for the occurrence.
Surviving The Correction
- Perhaps the strangest, and almost surreal aspect of this market episode, has been a sense that there is now a well-entrenched “crisis industry” that has captivated media, economics, politics and popular culture.
- We have commented on the pervasive media negativity that has persisted for years, and the constant drumbeat of impending doom that seems to emanate from the financial punditry.
- However, this time it appeared as if it was even more “manufactured” than ever before.
- Perhaps it was simply all too coincidental, but it certainly underscores -- and we believe validates -- our point that it is essential to make investment decisions based on the business merits of a company.
- Investors should intend to own companies through multiple market and economic cycles.
- When doing that, it makes these volatile environments much less of a concern.
- No doubt, it makes planning for both individual and institutional investors crucial, but we are convinced it is the best way to build wealth over time.
- We are more excited about the possibilities our companies represent than we have been in many years. No correction, nor bear market will shake that enthusiasm.
Jim O’Shaughnessy: Fear Signals Created By The Reptilian Brain
ValueWalk's Raul Panganiban interviews Jim O’Shaughnessy, Chairman, Co-chief Investment Officer, and Portfolio Manager at O’Shaughnessy Asset Management. In this part, Jim discusses the fear and emotional signals created by the reptilian brain. Q1 2020 hedge fund letters, conferences and more That's very cool. For the factor to try to seek the reason why it works, Read More