September 2, 2015
Persevering Through an Ugly Month
As August closes and September begins, it appears the volatility rolls on and our perseverance will continue to be tested. What can be learned from this last tumultuous month? And what does this mean for those interested in retirement income?
A Larger Problem?
Josh Peters, CFA from Morningstar had this to say last Friday, “…I don’t think we learned anything about the economy or corporate earnings that we didn’t already know. My best guess is that the market was simply playing catch-up: The S&P had traded in such a narrow range for such a long time that when that range broke, we experienced six months’ worth of pent-up volatility in less than two weeks.”
In other words, the economy doesn’t look much different on September 1 than it did on August 1, but the stock market looks very different. In the month of August the S&P 500 was down -6.5%. This should be contrasted with your account that was down significantly less. On average our accounts were down two-thirds this amount, or -4% for the same time period. This is still a very ugly month for investing, but we’re glad to see the more conservative accounts come out on top.
It’s important to remember that the stock market performance is not the same as our economy’s performance. The stock market measures corporate profitability on a daily basis and is subject to global news on a moment-by-moment basis. Our economy continues to be relatively strong for reasons we’ve outlined in some of our last letters and we anticipate the accounts will reflect the strength of the economy in the long run.
Dean Baker, an economist for The Center for Economic Policy and Research in D.C., wrote this just recently, “First and most importantly, the stock market is not the economy. The stock market has fluctuations all the time that have nothing to do with the real economy. The most famous was the 1987 crash, which did not correspond to any real-world bad event that anyone could identify.”
The philosophy of Josh Peters and Morningstar looks less at short-term volatility and more at the underlying profitability and the ability to pay and grow dividends. This approach uncovers the strongest companies and is why we feel so good about the portfolio in such volatile times.
Retirement Income Advisors – What’s Next?
Next up on the list of buys are three companies: Johnson and Johnson JNJ, a name almost everyone knows, National Grid NGG, a utility company, and Cheniere Energy LNG, a natural gas exporting company we owned earlier this year. If the market continues its emotional swings this month we look forward to picking these up for some incredibly low prices.
Lastly, we’ve gotten some very nice feedback on these letters so we’ve decided to make these a regular part of our business. Please let us know if you have any questions or if you’d like to discuss further.
-Tim & Bruce
