A True Halloween Scare: Volatility Returns to the Marketplace

Recently, we here at DWM posted a blog discussing the phenomenon that “Bull Market Runs Come in All Lengths”. Within this article, we mentioned the idea that before our current bull run ends, we may see many more pullbacks and/or corrections.

Within the current month, we have seen these types of market downturns as investor fears of upcoming mid-term elections, tariffs, rising rates,  and international economic slow-down issues have spiked levels of consumer fear (measured by the volatility index, VIX), by nearly 50% .

While this data can’t tell us whether the current bull market run is coming to an end, it opens up the opportunity to better understand just what is happening in the economy, and how we should handle times like these.

To understand the severity of market moves, there are three unique distinctions: a pullback, a correction, and a bear market, which signify downward market moves of 5%, 10%, and 20% respectively.

Over the past month, securities within all asset classes – equities, fixed income, and alternatives – have experienced one of these. On October 23rd, in fact, over 40% of the stocks in the S&P 500 were considered to be in bear market territory. Since then, markets have continued their run of ups and downs.

What can this market data tell us about the future? Unfortunately, not much. While markets tend to be cyclical in nature over the long-term, the short-term is usually marred by emotions (herd mentality, greed, and fear) rather than by solid fundamental and economic modeling. Furthermore, the risk of attempting to predict these short-term outcomes can have a serious long-term effect on the performance of an investor. Studies have shown that by missing out on only a few days strong returns in a market cycle can drastically impact the portfolio’s overall return.

Thus, in order to stay on track with long-term financial goals, one of the most successful and least anxiety-inducing ways to manage investments is to generate a financial plan, assess and re-assess risk tolerance regularly, and continually stay disciplined to these values in order to avoid making emotional and poor decisions. In conjunction with these actions, an investment portfolio needs both an appropriate asset allocation based on a client’s financial plan and has to be made up of a well-diversified portfolio that can help provide exposure to market areas, such as fixed income and alternatives, that are arenas that may still produce returns even with stocks stuck in a slowdown. The combination of these strategies can work as shields to protect both an investor’s assets, and his/her mental health during times of volatility such as today’s challenging marketplace.

At times, corrections, pullbacks, and even bear markets can actually be good things! If certain areas of the market are being overvalued, or company valuations are getting ahead of their fundamentals, pullbacks and corrections can serve as a check and balance system, to get these more in line. This makes companies, sectors, and markets more stable as they can refresh a bull market that is verging on inflating itself beyond its means.

Furthermore, a pullback, correction, or bear market move down for a certain security can provide other opportunities. For example, this month, DWM will be creating value for clients by taking advantage of tax-loss harvesting options. Tax-loss harvesting is the process of selling out of a security that has lost value since an investor first bought it, and using that loss to offset any gains that an investor realized during a tax year. This upside can serve as a nice treat to offset the “trick”-y investment arena of October.

One other somewhat notable factoid is that in the mid-term election year of October 2014, the stock market took a noticeably similar look. That of the Dow Jones down nearly 3%, rebounding, and selling off throughout, ultimately dropping into correction territory. This was quickly followed by a November post-election market boom hitting record highs for the Dow and S&P 500. Once again, while interesting to see, take these numbers with a grain of salt moving forward and looking at future returns.

All in all, keeping in mind that while volatility and uncertainty in the marketplace can be scary, maintaining a balanced, disciplined portfolio and financial plan, and staying dedicated to that plan throughout all market cycles is the key to being financially sound and minimizing the number of sleepless nights. At DWM, we proactively discuss these matters with clients, and strive to keep our clients informed, motivated, and on-target to their financial plans to help them reach their long-term financial goals. Happy Halloween!

Bull Market Runs Come in All Lengths

 

Bull_Market_Chart.png

Let me help you with the details of the above chart- though it is difficult to read, it’s quite important.   This graph from First Trust reflects the historical performance of the S&P 500 index from 1926 through June 2018. The blue represents bull markets; the red bear markets. It’s obvious that there is a lot more blue on this chart than red. That’s why we encourage you to “stay invested” through the ups and downs of the markets in a risk appropriate, diversified portfolio.

There are 8 bear markets shown. These represent periods of time when markets went down 20% or more. The longest and largest, from 1929-1932, was caused by the Great Depression. This bear market lasted 2.8 years and represented a cumulative decline of 83.4% overall; 47% per year. Ouch. Other bear markets have been much tamer. The average bear market period for the eight periods shown above lasted 1.4 years with an average cumulative loss of 41%. The bear market in 2008-2009 caused by the financial crisis lasted 1.3 years, with a 51% cumulative decline, 41% per year.

There are 9 bull markets shown. The longest and largest occurred after World War II from 1948 to 1963. This bull market lasted 15.1 years and represented a cumulative total return of 936%, or 17% per year. The average bull market has lasted 9.1 years with a cumulative total return of 476%; 21% per year. Some bull markets have been as short as 2.5 years and there have been other longer bull markets of 12.8, 12.9 and 13.9 years.  Our current bull market started in Spring 2009 and has lasted 9.3 years, with a cumulative total return of 350%; 17.5% per year.

At DWM, we are asked the question: “How long can this bull market continue?” This question seems to be based on a concern that a bull market comes with a pre-ordained expiration date; when it runs out of whatever made it go. However, selling equities because a bull market run is longer than average has been a great way to miss out on lots of gains. Remember, bull market runs come in all lengths.

While a bull market may be technically defined as a period of time after a 20% drop (bear market) has reached its end, it’s probably healthier to view a bull market from an economic perspective. Barry Ritholtz in a Friday Bloomberg article defined a bull market as follows: “An extended period of time, typically lasting 10-20 years, driven by broad economic shifts that create an environment conducive to increasing corporate revenue and earnings. Its most dominant feature is the increasing willingness of investors to pay more and more for a dollar of earnings.” This is exactly what we have seen in periods after WWII, the 1980 and 1990s biotech boom and now the maturation of internet, software and mobile companies.

Bear markets are typically brought about by recessions; often when the markets have gotten overheated (such as the dot.com bubble bust in 2000). Bear markets can also be brought on by a financial crisis, as we had in 2008-2009. Recoveries from financial crises are quite different from recoveries from depressions.   A post crisis recovery is marked by slow and erratic economic growth, weak wage gains and disappointing retail sales. Furthermore, investors, after being burned, remain skittish for years. The 2008-2009 crisis scarred consumers and left them more determined to sock away funds.

Case in point, the Wall Street Journal reported Monday morning that the personal savings rate is up to 7.2% from the 3.3% estimated previously. The new number exceeds the 6.4% average savings rate since 1990 and is almost three time the savings rate in 2005. The “wealth effect” that we saw in the mid 2000s that increased spending and dropped savings rates, is not happening now. This news, along with the reduction in corporate taxes, historically low unemployment and continued increased corporate earnings bodes well for a continuation of the current Bull Market despite ongoing negative factors.

Yes, we don’t know how long this bull market will run. And, we’re not going to try to time it. We do know, at some point, this bull market run will come to its natural end. Before it does, we may see more pullbacks (declines of 5% or more) or corrections (declines of 10% or more).   Remember this graph- lots more blue than red- and stay invested.

Biases: Fluid & Fuzzy vs Rational

In a perfect world, we would all make optimal decisions that would provide us with the greatest value and satisfaction.  In economics, the rational choice theory states that when you are presented with options, you would choose that which maximizes your personal satisfaction.  This theory assumes that you make your decision by weighing the costs and benefits, without emotion and external factors.  If it were only that simple.

Enter behavioral economics.  It draws on psychology and economics to try to explain why people sometimes make irrational decisions, i.e. not following predictions of economic models based on a consistently rational, self-interested, and “utility” maximizing approach?  Psychology explains this deviation of behavior from what is expected rationally to be caused by “biases.”  Common examples of biases include:

  • Anchoring- relying too heavily on one piece of information
  • Confirmation-focusing on information that confirms one’s preconceptions
  • Endowment-demanding much more for something owned than what you would be willing to pay to acquire it
  • FOMO- Fear of missing out- paying too much to get into the “game”
  • Loss aversion- valuing the pain of losing twice as much as the satisfaction of making a gain
  • Normalcy- refusing to plan for a potential disaster that has never happened before
  • Recency- predicting the future results by expected recent results to continue

Koen Smets’s recent article in the Behavioral Scientist “There is More to Behavioral Economics than Biases and Fallacies” defines behavioral economics as the field that confronts us with our deeply potentially irrational selves.  “We are bamboozled by biases, fooled by fallacies, entrapped by errors, hoodwinked by heuristics, deluded by illusions.”  Ouch.

This brings to mind Ebenezer Scrooge’s question of the Ghost of Christmas Future:  “Are these signs of things that will happen or may happen?”  Perfect question, Ebenezer.  Actually, there is a widespread misconception that biases explain or even produce behavior.  Biases merely describe behavior that may or may not be followed.  They are simply labels for an observed behavior that contradicts traditional economics’ simplified “rational” expectations.

The conversation about biases is generally negative:  they interfere with our decision making or undermine our health, wealth and happiness.  For example, consider loss aversion.  Ten of thousands of years ago, humans were more concerned about losing a week’s food supply than gaining an extra week’s.  Today, an individual might never invest their cash because of a fear of losing money and have the purchasing power of their funds decreased by inflation.  This loss aversion is part of our evolutionary DNA, but that doesn’t mean that we have to exhibit that behavior.

Biases are tendencies that are not uniformly shared or employed.  Mr. Smet describes human behavior as “fluid and fuzzy.” These days, speed and simplification are keys and behavior based on biases is increasing.  Knowing that people are taking shortcuts, marketing has really stepped up its game.

“Heuristics” are really becoming huge. They are the various techniques we use to solve problems, learn or discover by using shortcuts.  Persuasion heuristics save us time and effort in making many of the hundreds of decisions we are confronted with each day.  Robert Cialdini, author of “Persuasion and Marketing” and political consultant, offers six key principles to persuading (or perhaps hoodwinking) a consumer using heuristics:

  • Authority-the voice or face of authority drives results. (Celebrity endorsements work)
  • Commitment and Consistency-consistent follow through establishes trust (Repetition works)
  • Scarcity-create hype based on time limits and expirations. (I see this every time I go to book a hotel room)
  • Liking-people are persuaded by others liking something. (Tripadvisor)
  • Social Proof- Show evidence of results. (People like to hear positive statistics-whether or not they are true)
  • Reciprocity-Offer discounts, free trials, sample products (people tend to “return a favor”)

We know biases exist. Some of them are in our DNA; some we learn over time.  At the same time, people and companies are aware of these potential biases as they are marketing their products, services, or suggestions.  Certainly, for many small decisions we need to make every day, there is no problem with taking a shortcut and even employing a bias.

However, when it comes to really important decisions, such as your wealth and happiness, it’s time to step up your game and move from fluid and fuzzy to rational.  These very important decisions generally take more time and require more due diligence.   You need to make sure you thoroughly and objectively understand and investigate choices and understand the likely risks and rewards of each.  To keep yourself “bias-free” at these times, you may benefit from having the expertise, skill and objectivity of a wealth manager like DWM who works with these important matters every day.  There’s a time for fluid and fuzzy and a time for rationality.  We’re here to help you when it’s time for rationality. Give us a call.

 

 

 

 

 

DWM 1Q18 Market Commentary


In our last quarterly commentary, we cautioned not to get complacent, overconfident, or “too far out over your skis”. It’s ironic how just three months later, many investors’ emotions are just the opposite: unsure, cautious, and even scared. And rightly so, given the extreme up and downs for the first quarter of 2018. The stock market was in a classic “melt-up” state in January, only to quickly drop into correction territory in early February, then bounce and fall and bounce again from there. Yes, as I mentioned in my February 12th blog, volatility is back and here to stay (at least for the near future)!

Before looking ahead, let’s see how the major asset classes fared in 1Q18:

Equities: The S&P500 had its first quarterly loss since 2015, falling 0.76%. On the other side of the globe, developed countries also suffered, evidenced with the MSCI AC World Index registering a -0.88% return. Emerging markets were a stand-out, up 1.28%*. In a turn of events, smaller caps significantly outperformed larger caps. Much of this has to do with the trade war fears, i.e. many feel that smaller domestic companies will be less affected than some of the bigger domestic companies that rely on imports. Growth continued to outperform value. However, that gap narrowed in the last couple of weeks with some of the biggest cap-weighted tech names getting drubbed, including Facebook because of their user-data controversy and Trump’s monopolistic tweets at Amazon.

Fixed Income: Yields went up, powered by increasing expectations for growth and inflation in the wake of the recent $1.5 trillion tax cut. The yield on the 10-year Treasury note rose from 2.4% to 2.7%. When bond rates go up, prices go down. So not surprising the total return for the most popular bond proxy, the Barclays US Aggregate Bond Index, showed a 1.46% drop. Fortunately, for those with international exposure, you fared better. The Barclays Global Aggregate Bond Index rose 1.37%, helped by a weakening U.S. dollar (-2.59%**) pushing up local currency denominated bonds.

Alternatives: The Credit Suisse Liquid Alternative Beta Index, our chosen proxy for alternatives, was down 1.72%. Losers in the alternative arena include: trend-following strategies, like managed futures (-5.08%***), that don’t do well in whipsaw environments like 1Q18, and, MLPs, which were under duress primarily due to a tax decision which we think was overdone. Winners include gold****, which was up +1.76% for its safe haven status, and insurance-linked funds† (+1.60%), which have hardly any correlation to the financial markets.

In conclusion, most balanced investors are seeing quarterly losses, albeit small, for the first time in a while. So where do we go from here?

Inflation concerns were the main culprit to the February sell-off, but there are other concerns weighing upon the market now: fears of a trade war brought on by tariffs, escalated scrutiny of technology giants, new Fed leadership, increasing interest rates, stock valuation levels, and a bull market long in the tooth in its 10th year.

Opposite these worries is an incredibly hot economy right now, supported by the tax cut which should boost corporate earnings to big heights. In fact, FactSet has projected earnings for S&P500 companies to increase 17% in 1Q18 from 1Q17!

And, whereas there has been much dialogue regarding how the S&P500 has been trading at lofty valuations, the recent move of stock prices downward has really been quite healthy! It has put valuations back in-line with historical averages. In fact, the forward 12-month PE (Price-to-Equity Ratio) of the S&P500 at the time of this writing is almost identical to its 25-yr average of 16.1. International stocks, as represented by the MSCI ACW ex-US is even more appealing, trading at a 13.3 forward PE.

We don’t think inflation will get out of hand. Even with unemployment around all-time lows, wage growth is barely moving up. So we doubt that we’ll see inflation tick over 2¼%. That said, we do think the Fed will continue to raise rates. Frankly, they need to take advantage of a good economy to bring rates up closer to “normal” so that they have some fire-power in the event of future slow economic times. But that doesn’t mean they’ll be overly aggressive. The new Fed Head, Jerome Powell, like his predecessor, most likely will be easy on the brakes, keeping focus on how the Fed actions play off within the market.

Put it all-together and it seems like we’re in a tug-of-war of sorts between the positives and the negatives. At DWM, we feel like the positives will outweigh the negatives and are cautiously optimistic for full year 2018 returns in the black, but nothing can be guaranteed. The only couple things one can really count on are:

1.Continued volatility. After an abnormally stable 2017 that saw little whipsaw, 2018’s volatility is more reminiscent to the historical average of the last few decades. Back to “normal”.

2.DWM keeping its clients informed and embracing events as they unfold, keeping portfolios positioned and financial plans updated to weather what’s next.
Here’s looking to what 2Q18 brings us!

Brett M. Detterbeck, CFA, CFP®

DETTERBECK WEALTH MANAGEMENT

*represented by the MSCI Emerging Markets Index

**represented by the WSJ Dollar Index

***represented by the Credit Suisse Managed Futures Strategy Fund

****represented by the iShares Gold Trust

†represented by the Pioneer ILS Interval Fund

COMPLACENCY CHECK: MARKETS FINALLY GO DOWN & THE RETURN OF LONG OVERDUE VOLATILITY

 

The last week hasn’t been kind to investors. The S&P500 and Dow officially entered “correction” territory, which signifies a decline of at least 10% from a recent high, after all-time record highs only a couple weeks ago.   What’s going on???

 

The culprit: things were too good!  Recent stronger than expected reports on wages and jobs means growth may be “overheating” and that can lead to inflation and rising interest rates. Rising rates equal higher bond yields, which can make bonds more attractive than stocks, and – VOILA! – now traders don’t want to own stocks, many of which have become quite expensive on a valuation perspective from the nine-year Bull run. Then, in this worst-case scenario, stocks go down and that causes consumer confidence to wane which means Joe Investor won’t want to be another 4G TV. Consumer spending slows, corporate earnings suffer, and recession takes place.

 

Vicious circle, huh? It doesn’t have to be exactly like that. Furthermore, cycles can take a long time to play out – years, not days. In this fast-paced, information at your fingertips society we’re in, we forget that.

Last Friday’s jobs report showed the largest annual increase in wages since 2009. In hindsight, this wasn’t surprising given that 18 states pushed up minimum wages to start 2018. Furthermore, many major corporations, raking it in from the recent tax cuts, have provided one-time Tax Reform-related bonuses to workers. So these government reports, that some traders obsess over, may have been amplified for January and most likely will come down to earth in the ensuing months.

 

It was just a couple of years ago when many were concerned about DEFLATION and hoped of the day when the Fed could raise rates back to “normalcy”. This schizophrenic market is now focused on the fear of INFLATION. The threat of inflation and higher bond yields – evidenced by the Ten-Year Bond reaching four-year highs yesterday at 2.85% – has some worried. But frankly, a 3% or even 4% Ten-Year Bond environment shouldn’t be so concerning. For the last several decades, the 10-Year was higher than that and could be nice “fresh powder” for a Fed when recessionary times come.

 

The “buy the dip” mentality that has been so common place the last few years has not shown up this time around, or at least not until today. Some contend that “buy the dip” investors didn’t have enough time as the quants and hedge funds with big volatility-related bets work through the crash in that subsector.

After a very calm 2017 where we didn’t see any stock markets daily moves of over 2%, we’ve already had a few this year. Volatility is back to “normal” – not 2017 normal, but normal when we are comparing to the last 100 years or so. It was only February of 2016 when we had our last correction, which really isn’t that long ago. But complacency is unfortunately an easy characteristic to exhibit after such a long period of subdued volatility. Hopefully it didn’t lead to overconfidence.

So we’re in a correction…what do we do now?

 

There have been over a dozen market pullbacks of 5% or more since March 2009. This is another one! According to Goldman Sachs Chief Global Equity Strategist Peter Oppenheimer within a January 29 report, “The average bull market ‘correction’ is 13% over four months and takes four months to recover.” Which tells you that generally when the market comes back, it does so relatively quickly, as we’ve already seen today.

 

So, it’s a fool’s game to try to time the market and jump in and out of it. No one has a crystal ball. Furthermore, we know that over time that staying invested is your friend. Studies show that just missing a few days of strong returns (which we could very well get next week or later this month), can drastically impact overall performance.

So avoid any emotional mistakes by staying invested and staying disciplined. Don’t be making any short-term knee-jerk reactions; instead think long-term and focus on the things that can be controlled:

 

§  Create an investment plan to fit your needs and risk tolerance

§  Identify an appropriate asset allocation target mix

§  Structure a well-balanced, diversified portfolio

§  Reduce expenses through low turnover and via passive investments where available

§  Minimize taxes by using asset location, tax loss harvesting, etc.

§  Rebalance on a regular basis, taking advantage of market over-reactions by buying at low points of the market cycle and selling at high points

§  Stay Invested

 

In closing, a pullback / correction like this one is needed to allow the market to recalibrate. It can be a very healthy event because it may signify that the underlying assets’ valuations are getting back in line with fundamentals. So don’t get anxious over this return of long overdue market volatility. We should all get used to this “new normal” and not let our emotions cause us to take irrational actions that could lower our long-term chances of financial success.

 

Don’t hesitate to contact us to further discuss your portfolios and your overall wealth management.

 

[1] Cheng, Evelyn. “The stock market is officially in a correction… here’s what usually happens next.” CNBC, 8 February 2018, https://www.cnbc.com/2018/02/08/the-stock-market-is-officially-in-a-correction–heres-what-usually-happens-next.html. Accessed 12 February 2018.

DOW 26,000-WHEN’S THE LAST TIME YOU THOUGHT ABOUT YOUR RISK?

With U.S. stocks at all-time highs, now is the perfect time to review your risk profile and then make sure the asset allocation within your investment portfolio matches it.  Equity markets have been on a tear.  In 2017, the average diversified US stock fund returned 18%, while the average international stock fund returned 27%.  In the first three weeks of 2018, the MSCI World Index of stocks has increased 5.6%. With low interest rates and inflation, accelerating growth and the recent passage of the Tax Cuts and Jobs Act, it looks like this streak could continue in 2018.

During the current nine year bull market, investor emotions about stocks have gone from optimism to elation and many investors now are not only complacent, but overconfident. Yet, with valuations soaring, we are approaching the point of maximum financial risk.  Certainly, at some point, we will have a pullback, correction or crash.

It always happens.  It could be a conflict in N. Korea or Iran or somewhere else.  It could be a worldwide health scare.  It could be higher interest rates negatively impacting our rising national and personal debt.  It could be something none of us even consider today.  History shows it will happen.  We need to be ready for it by having an asset allocation in our portfolios that matches our risk profile.

What exactly is a risk profile?  There are three components of your risk profile.  First, your risk capacity, or ability to withstand risk.  Second, your risk tolerance, or willingness to accept large swings in investment returns.  It’s the way we are hard-wired to respond to volatility.  Third, your risk perception, or short-term subjective judgment about the characteristics and severity of risk.

We classify your risk profile into one of five categories of risk: defensive (very low), conservative (low), balanced (moderate), growth (high) and aggressive (very high).  As a general rule, younger investors are more willing to take on a higher level of risk.  However, that’s not always true.  Investors in their 80s and 90s who know that they have ample funds for their lifetimes and beyond, and who can emotionally handle high risk, may have an aggressive risk profile, particularly when they plan to leave most of their money to the beneficiaries.  Everyone’s circumstances and emotions are different.  Profiles can change over time, particularly when there are life changing events, such as marriage, birth of a child, loss of job, retirement, changes in health or other matters.  Therefore, it’s important to regularly assess your risk profile.

Here’s the process:

 

Step 1. Quantify your lifetime monetary goals and compare those with your expected lifetime assets. During your accumulation years, how much will you add to your retirement funds per year?  How many years until retirement?  How much money will you need to withdraw annually during retirement for your needs, wants and wishes?  What are your sources of retirement income?  What’s your realistic life expectancy?  What market return is required to provide the likely outcome of success- not running out of money?  Do the goals require a high rate of return just to have a chance of success or is the goal so low risk that even a bad market outcome won’t cause it to fail?

Risk capacity isn’t simply the amount of assets you have; rather it is the comparison of those assets to your expected withdrawal rate from your portfolio.  A low withdrawal rate from your portfolio, e.g. 1% or 2% a year, means you have high risk capacity. A high withdrawal rate, such as 6% or more, means you have low risk capacity.

Step 2.  Evaluate your tolerance for risk.  What’s your comfort level with volatility?  Are you aggressive? Moderate?  Defensive? How does that compare to the risk needed in your portfolio to meet your goals?  If the risk needed to meet your goals exceeds your risk tolerance, you need to go back and modify your goals.  On the other hand, if your risk tolerance exceeds the risk level to meet your goals, does that mean you need to take on more risk just because you can or because you can afford it? You need to go through the numbers and make important decisions.

Step 3. Compare the risk in your portfolio to your risk tolerance.  Separate your assets into all three classes: equities, fixed income (including cash) and alternatives and determine your asset allocation.  A balanced portfolio might have roughly 50% equities, 25% fixed income and 25% alternatives.  An aggressive (very high risk) portfolio could have 80% equities and a defensive (very low risk) portfolio might have only 10-35% equities.  If your portfolio is riskier than your risk tolerance, changes need to be made immediately.  If your portfolio risk is lower than your risk tolerance, you still need to make sure it is of sufficient risk for you to meet your goals, considering inflation and taxes.

Step 4.  Rebalance your portfolio to a risk level equal to or less than your risk tolerance and sufficient to meet your goals.  Make sure you diversify your portfolio within asset class and asset style. Diversification reduces risk.  Reducing portfolio expenses and taxes increases returns. Alternatives are designed to reduce risk and increase returns. Trying to time the market increases your risk. Set your asset allocation for the long-term and don’t change it based on feelings of emotion. Stay invested.

Step 5.  Most importantly, regularly review and monitor your goals, risk profile and the asset allocation within your portfolio.  The results: Improved lifetime probability of financial success and peace of mind.

Arrrrrrrrrgh!

sb frazzleLet’s all go ahead and be emotional and let out a big scream. Arrrrrrrrrgh! These stock markets are really frustrating. After a lackluster 2015, equity markets are down around 10% in 2016. Of course, a balanced account might “only” be down 5% in 2016, but that still doesn’t feel good. Aren’t markets supposed to rise in Presidential Election Years?

Generally, that’s true. Since 1933, the S&P 500 has risen 8% per year in election years.

The simple fact is that politics is likely having a big impact on the markets. Certainly, investors are concerned about the price of oil, slowing world economic growth and China. But, a major part of the anxiety is very likely being caused by the presidential race. It’s similar to the impact that the Ebola scare had on the markets in mid-2014.

Think of it. In a normal election year, whether we are Republican, Democrat or Independent, we find a candidate that we think can make a change for the better in the U.S. and perhaps the world. We support that candidate with the hope and the optimism that things will be better after the election. In part, this typical election year optimism has helped produce historically good returns. Hence, there appears to be both a correlation between election year and good results and a likely causation.

So, what do we have now? Two political outsiders whose popularity has been largely anti-establishment. Donald Trump’s and Bernie Sanders’s victories in New Hampshire were seen as a vote of no confidence in the nation’s economy and the political status quo. Yet, while their supporters are happy to show their anger at the current situation and hope for change, neither candidate has any proven track record of being able to accomplish on a nationwide level what they propose.

Investors of all kinds are skeptical and concerned. The two “establishment” candidates, Jeb Bush and Hillary Clinton, are struggling.   There is a real question as to what would happen if Trump or Sanders was elected. This has likely helped spook investors, big and small.

Remember, too, that Mr. Trump is, according to the NYT, strongest among Republicans who are less affluent and less educated. Mr. Sanders appeals to a wide variety of people and has raised millions of dollars of support without the aid of a Super PAC. In Tuesday night’s victory speech, he thanked his more than one million supporters who contributed an average of $27 to his campaign. Their supporters are not your typical investor or Wall Street firms. Hence, this optimism generated by both candidates from their supporters doesn’t translate to typical election year investor optimism.

Then we have the omnipresent media. Every day we are besieged by the newspapers, TV and other sources filled with political content, much of which is pure useless trivia. Most candidates are all quite happy to drone on about the current problems and how they alone have simple solutions to fix everything. Educated people and institutions who represent the bulk of investors aren’t buying it. The result: a gradual, “grinding” downward slide that is worse than a fast panic-driven rout. It’s like everyone is bringing up the negative over and over and the “Group Think” pushes the equity markets down.

Brett was on a Goldman Sachs conference call yesterday discussing market volatility. They reiterated what Schwab, BlackRock and others have said. Yes, there continues to be concerns about China, credit/rates, oil, and expectations of monetary policy. They think there is a 15% chance of recession in the next 12 months. Which is good because any year on average is 24%. They summed it up this way, “There is a disconnect between fundamentals and what the market is saying. Take it easy, stay disciplined, stay diversified, and stay invested.”

We agree, the markets may continue to be choppy for 2016, particularly if a viable, experienced candidate, known and trusted by the investment community doesn’t move to the head of the pack. In the meantime, we suggest you let out a big scream and wait for the markets to swing back and catch up with the fundamentals. We know they will, we just don’t know when.