Doing The Right Thing

“Good investors gather information, put that information into current and historical context, then make sound decisions.”

If it feels like there hasn’t been a lot of progress in equity markets lately, you are absolutely right. Major market equity indexes have been rolling up and down in a trading range since mid-April. On Friday, May 22nd, the DJIA closed at 24,465. On April 17th the DJIA closed at 24,242. That’s a whopping 0.92%. However, trading ranges can serve as staging areas before a major offensive, and that’s how this is shaping up to me. The 150-day moving average is starting to curl up and the 50-day moving average is well within reach. A breakout should take equity indexes back into the range they were enjoying prior to the correction.

Market volatility has not yet abated. Trading range markets are vulnerable to news events, as we have seen the past several weeks. Advances and declines that should have seen 30-50 point moves on the DJIA are flying around with 300-500 point moves. The volatility index, also known as the VIX, has backed off from the lofty levels in March, but is still higher than desired. For perspective, in March the VIX hit a high of 85.47. Friday it closed at 28.16, and we would like to see it back under 16. The trend for the VIX is heading in the right direction, but hasn’t arrived at the station yet.

We closely monitor which market sectors were performing the worst in the sell-off portion of the correction, as well as those which perform the best in the rally portion of the correction. It is normal to see the leadership return quickly, which has been the case in this correction. This is why it is so hazardous to attempt to trade during the early stage of a correction. That being said, the secondary leadership often gets shuffled. In this correction, the financial sector and the industrials sector did not recover nearly as strong as consumer discretionary and basic materials. This tells us where to make portfolio adjustments that address volatility.

The antidote for equity market volatility is bonds, the fixed income portion of financial markets. While certain bond sectors can also be quite volatile, such as long-term bonds, stability can often be found in selected fixed income sectors. In our current market, a fixed income sector that has stood out is the preferred stock sector. This can be a little confusing because it is labeled ‘stock’, yet it actually behaves as, and is categorized in, the fixed income and bond portion of financial securities. Other bond sectors that have shown relative strength are intermediate-term corporate bonds, floating rate bonds, and high yield bonds.

From an economic standpoint, the closing down of 75% of the nation’s economy has been an enormous shock. The decisions and the timing of those decisions will be analyzed and argued for decades, as will the trillions of dollars lost and loaded onto our nation’s debt. Better preparation and more precise execution will hopefully prevent such a massive event from ever occurring again. And it is totally unfunny how quickly our politicians seized the opportunity to finance dozens of non-relevant causes as they saddle-bagged another trillion dollars of debt on the economy.   

This Memorial Day weekend was quieter, and more distant than usual, which may be a blessing.  Challenges and struggles are a large part of life, critical in affecting change, crucial in making progress. Sometimes the challenges are presented by unforeseen enemies, but often can be self-inflicted. Either way this defines experience and gives us opportunities for improvement. I have absolutely no doubt that our nation can and will work through its problems. To quote Winston Churchill, “You can always count on Americans to do the right thing, after they’ve tried everything else.”   

Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.