They Finally Did It, What Do Rising Rates Mean?
Hello and Merry Christmas to all of you.
Time to sit down and write a few thoughts out before we close the year. I've been watching the market go up and down for all of 2015 and we are closing in on the final numbers for the year.
A quick refresher:
- The Dow started the year 2015 at 17,823.
- It sits today at 17,749, down -0.42% for the year
- The Dow has ranged from as high as 18,351 to as low as 15,370 in the last 12 months - a whopping 16% drop and back again
- Much of the volatility happened in mid-August and through September before recovering to early year levels
The big news today (Wednesday, December 16th) is of course the Federal Reserve raising interest rates. You can't help but stumble across at least a dozen articles that will give you opinions on what this means. Let me share a few thoughts from my perspective and you can add them to your own research as well. It has been nearly 10 years since we have seen a rate increase. Many in the financial "world" view this as a vote of confidence from the Fed that they see positive signs of growth in our economy. Typically as the Fed starts to raise interest rates it is seeing growth and inflation in the economy and the intent is to control that growth and temper the economy. They tried to get ahold of the runaway housing bubble in the mid-2000's by raising interest rates. It would seem that it was too little, too late back then. We can all think back to what happened in the early months of 2008 as the bubble burst. In fact, there is a new Hollywood spin on that bubble coming to theaters near you on Christmas Day. Check out The Big Short if you have time to catch a movie over the holidays.
The big question on my mind when rates start to move is how should our portfolios be positioned, and what's going to happen next?
In the early stages of a rising rate environment stocks typically perform very well. This is good news for us, because over the past year the Dow made one big drop and went right back to where it started within two months time. It is hard to gain any traction when the prevailing trend has been "flat" for almost twelve months now. If stocks are going to start to break out, now that we know where the Fed stands, we will begin talking a larger long position and more bullish stance in the portfolios. For all of this year I have been riding the fence, running what could arguably be considered a hedging strategy that attempts to protect your principal in a choppy market. The bad thing about this year so far is the results are about the same as the Dow - flat. Not fun, not up double digits, not sexy - just FLAT.
I know I say this from time to time as I visit with all of you face to face - but sometimes flat is ok. What we have to do to be successful is to stick to our plan and keep emotion out of the decision making. The biggest drag on a portfolio over the long run is draw downs, or losses. If we can strive to avoid large losses, we (like the tortoise) will win the race. Slow and steady... I base my trading decisions on several different sources of research, most of which come in nightly. So when I leave the office at the end of the day the work is never really done. I have to check in on the emails around 10pm and interpret what's happened this trading day and see how we are going to position for tomorrow. It is a bit of work, but I buy advice from sources with track records decades long. Keeping the emotion out of their short-term advice being wrong is sometimes difficult. However, I bought the "map" based on the roads it traveled for years before, I'm not going to reinvent the map because there is construction ahead.
As I close, I would challenge you to keep your eye on the overall goal for your investments, not the comparison of short-term returns and "hot" ideas. I have a great planning tool called RiskAlyze that we can use to plug in your goals and your current portfolio. The software will allow us to model several different scenarios and see if we are on track or if adjustments are warranted. If we have not looked at it in the office please give me a call and we can set a time to give it a try.
Blessings to all of you this holiday season, and Happy New Year.