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John R. Deitrick, CFP®
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Portfolio Manager's
Commentary
The Portfolio Manager's Commentary
will be provided on a weekly basis. Enjoy!
Please click on the link below.
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Global Financial Private Capital, is an SEC registered investment adviser principally located in Sarasota, Florida. Investment Advisory Services offered on a fee basis through Global Financial Private Capital, LLC. Securities offered through GF Investment Services, LLC, Member FINRA/SIPC.
501 North Cattlemen Road, Suite 106, Sarasota, FL 34232
Tel (866) 641-2186
Synopsis
- On October 19, 1987, the S&P 500 dropped over 20% for the single worst
day in the history of the U.S. stock market.
- The fear ingrained into the minds of those who lived through Black Monday
is a magnet for fear mongers.
- Charts that compare one year to another pop up all the time because they
are highly effective weapons for fear mongers.
Black Monday Redux
On October 19, 1987, the S&P 500 dropped over 20% for the single worst day in the history of the U.S. stock market. That trading session remains one of the most notorious in financial history, and it has ever since carried the name "Black Monday" for good reason.
The magnitude of this selloff was overwhelming. To put it into context, the index has fallen more than 20% in a year only three times since 1970, so to stomach such a drop in a single day created widespread panic that disseminated throughout global financial markets.
Books have been written, and courses at the best business schools in the country continue to teach future financiers about its impact. It also caused a wave of regulatory changes including trade clearing procedures and the implementation of "circuit breakers,"
which are designed to reduce the effects of panic by halting trading if an index falls past a threshold.
The turmoil ingrained into the minds of those who lived through Black Monday is a magnet for fear mongers, and they seem to come up with new and creative ways to compare the events of today against what led the market to fall so much back then.
The chart below is the most recent attempt to elicit fear and has made its way across the internet over the past week or two. The blue line is the price of S&P 500 index during 1987 (it is pretty easy to spot Black Monday), and the black line is the price of S&P 500 index this year. Plotting both years in the same chart allows us to compare the price action month-by-month.
Upon first glance, it appears that 2016 has been tracking 1987 rather closely through early October. Fear mongers are using this pattern to warn investors of an imminent stock market crash, and according to them, we are only a matter of days away.
Dispelling the Fear
A comprehensive understanding of financial history is an integral component of any professional investor's toolkit, but recognizing its limitations is equally important to prevent us from jumping to some very dangerous conclusions.
On its own, the chart above may look scary, but in reality, it is useless. Price movements are completely random and the drivers of the ups and downs back in 1987 are most certainly not what has been driving the stock market this year.
The chart below is all we need to cut the legs out from under the fear monger's case. It plots the performance rather than the actual level of the S&P 500 with the blue line representing 1987 and the black for this year.
This comparison changes the story dramatically. Prior to Black Monday, the stock market saw a near vertical rise of close to 40% going into early September. A move that high in less than ten months is almost as unprecedented as the ensuing selloff.
This year has been quite a different story. For those who may have forgotten, we began the year down over 6% in just the first week. By February, we were down over 10% until the market began its slow recovery.
Said another way, valuations were stretched to the point where they became far more susceptible to a pullback leading into Black Monday, whereas valuations currently are nowhere close to such risky levels.
One more dagger to the heart of the fear monger's case is that nobody, not even the SEC, knows for sure what caused Black Monday. When someone buys or sells a stock, no law requires that person to submit their reasoning for the trade. All we can do is review trading volumes and trust the commentary that came from the large trading desks on Wall Street.
NOTE
: There are a few catalysts that are widely believed to have caused the panic on Black Monday, but there are also an equal number of theories into the assassination of JFK.
Simply put, we may never know for sure what ultimately caused the market to lose over 20% in a single trading session, but what is far more certain is that today's economy and stock market look completely different than they did 29 years ago.
Implications for Investors
Anyone who has lived through a traumatic event will tell you that the emotional scars never really heal. Watching a nest egg lose over 20% in less than eight hours certainly qualifies as traumatic, even to the most seasoned investor.
The fear mongers know this to be the case, and it is precisely why they will never let us forget Black Monday because this trauma is an all-access pass to the emotional core of their prey. Once inside, they navigate seamlessly to their final destination, which is a victim's wallet.
Price charts that compare one year to another act a lot like clouds, where the longer you stare at them, the more your brain will convince you that a picture or pattern is emerging. These charts pop up constantly because they are highly effective weapons for fear mongers, when in reality, they provide no value at all.
Lastly, fear mongers and market pundits conveniently leave out the fact that despite such a brutal October, the S&P 500 ended up over 5% in 1987. Those who stuck to their strategy and ignored the handful of volatile days were rewarded.
The bottom line is that I have no idea if the stock market will end the year up or down, but what I am certain about is that it is best to ignore these types of comparisons.
This commentary is not intended as investment advice or an investment recommendation. It is solely the opinion or our investment managers at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Past performance is no indication of future performance. Liquid securities, such as those held within DIAS portfolios, can fall in value. Global Financial Private Capital is an SEC Registered Investment Adviser.
Global Financial Private Capital, is an SEC registered investment adviser principally located in Sarasota, Florida. Investment Advisory Services offered on a fee basis through Global Financial Private Capital, LLC. Securities offered through GF Investment Services, LLC, Member FINRA/SIPC.
501 North Cattlemen Road, Suite 106, Sarasota, FL 34232
Tel (866) 641-2186
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BY THE NUMBER$
LUMP-SUM NEEDED - A present value (PV) amount of $1.96 million in a pre-tax retirement account is required today to fund a future payment stream of 30 years of $100,000 annually (with a 2.5% increase for maintenance of purchasing power) assuming that a 6% rate of return (ROR) can be maintained into the future. If the ROR falls to 5%, the PV amount rises 13% to $2.21 million. If the ROR rises to 7%, the PV amount falls 11% to $1.75 million. These calculations do not account for the payment of federal income taxes which would be due as a result of withdrawals from any pre-tax retirement account (source: BTN Research).
TAX CHANGES
- The Tax Reform Act of 1986 was enacted on 10/22/86, i.e., 30 years ago this week. The legislation, signed into law by Ronald Reagan, was the last time the US tax code underwent major simplification. The number of tax brackets was reduced from 15 to 3. The top marginal rate was lowered from 50% to 28% while the lowest marginal rate was increased from 0% to 15% (source: Tax Reform Act of 1986).
GROWING - The US economy has been growing for the last 87 months (i.e., no recession), an expansion exceeded in length only 3 times since 1900 (source: National Bureau of Economic Research).
BIG INCOME - Warren Buffett, the 3rd wealthiest person in the world (ranked behind only Bill Gates and Amancio Ortega), reported $11.6 million of adjusted gross income in 2015. Bill and Hillary Clinton reported $10.6 million of adjusted gross income in 2015 (source: Forbes).
A CHANCE TO START OVER - After peaking at 1.562 million in 2010, personal bankruptcies (either Chapter 7 or Chapter 13) are on pace to decline on a year-over-year basis for the 6th consecutive year in 2016. Through 9/30/16, just 593,000 Americans have filed for bankruptcy protection YTD (source: American Bankruptcy Institute).
HOUSE PRICES - The average price of a single family home in the United States peaked in March 2007, bottomed in May 2011, and then rose back above its March 2007 average high price in November 2015 where it has stayed through July 2016 (latest data released). From its May 2011 low, home prices are up +32%. From its March 2007 previous high, home prices are up just +4% (source: Office of Federal Housing Enterprise Oversight).
NOT COMPLETELY ON OUR OWN - 24% of the petroleum consumed by the United States in 2015 (including crude oil, gasoline and diesel fuel) was imported from foreign countries. The 24% was the lowest import percentage since 1970 (source: Energy Information Administration).
KILLER STORMS - Hurricane Katrina (August 2005) killed 1,833 people. Hurricane Matthew (October 2016) killed 1,045 people (source: National Oceanic and Atmospheric Administration).
A LOT MORE MONEY TODAY
- Kevin Chappell made $4.5 million on the PGA Tour this year in 27 starts, winning zero times. Arnold Palmer and Johnny Miller made a combined $4.6 million on the PGA Tour in their careers, winning 87 tournaments, including 9 Major championships (source: PGA).
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I hope you find this information adds value. If you would like to talk to John regarding these, or any other financial concerns, please feel free to call us at (614) 602-6506 and we will be happy to schedule a visit.
If for whatever reason you no longer wish to receive this newsletter, it's very simple to unsubscribe at the bottom of the page.
Make it a Great Week!
Enjoy His gift of today!
Investment Advisory Services offered on a fee basis through Global Financial Private Capital, LLC, an SEC Registered Investment Adviser. Past performance is not indicative of future results. This commentary is not intended as investment advice or an investment recommendation it is solely the opinion of our investment managers at the time of writing. Nothing in this commentary should be considered as a solicitation to buy or sell securities. Insurance and Annuity product guarantees are subject to the claims-paying ability of the issuing company, and are not offered through Global Financial Private Capital.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and the federally registered CFP (with flame design) in the US., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
AssetLock® is tracking software used to monitor the performance of a client's portfolio, and to predetermine the amount of downside the client is willing to tolerate. It is NOT an actual stop order and will NOT automatically sell the individual securities in the portfolio. Therefore, the AssetLock® value is a reference point to encourage a conversation between the advisor/firm and the client to determine if the client's portfolio should remain unchanged, reset the AssetLock® percentage by reallocating to a different risk profile, liquidate part or all of their portfolio or opt out of AssetLock®.
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John R. Deitrick
CFP®
Advanced Retirement Design LLC.
7263 Sawmill Rd.
Suite 150
Dublin, OH 43016
Office: 614.602.6506
Fax: 614.259.6094
Email: jdeitrick@advancedretirementdesign.com
advancedretirementdesign.com
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