December Market CommentaryDecember 1st, 2017 by Anchor Bay Capital's Investment Team
This month’s commentary contains:
Multi-year highs have been reached across most global stock markets with many investors believing it’s a result of an economic recovery worldwide. Corporate earnings, low interest rates and healthier economic data have contributed to this global rally in 2017.
The Dow Jones has recorded the most new highs this year, in fact the most it has experienced since 1995. The Nasdaq has experienced a 28% gain this year as well as 69 new highs, the most ever in a single year.
According to the Wall Street Journal “the U.S. economy has benefited, registering its best six months stretch of growth in three years.” The return to growth and reduced market volatility are in part a result of Federal Reserve policy which has kept interest rates low following the recession.
There is plenty of optimism as low market volatility has resulted in many investors buying stocks notwithstanding high valuations. At this point, it is important to be prudent with investment moves as there will inevitably be a correction of these high valuations. This article from Bloomberg Markets explains some of the key factors that may result in a return of volatility:
“It has seldom been the case that equities, bonds and credit have been similarly expensive at the same time, only in the Roaring ’20s and the Golden ’50s,” … “All good things must come to an end” and “there will be a bear market, eventually”
We remind you that we have made modifications in most of our portfolio models by taking some profits and adding some liquidity. This means that we have sold some stocks that have gains and moved this money to cash equivalents. This will allow us to repurchase those stocks in the moments that we see some better values in the market.
We may continue to see growth in the short term, however as noted above, valuations have become much higher recently, with many of the same cyclical stocks. Because of this we have implemented a stop-loss strategy with several companies that have produced strong returns in the current market cycle. A stop-loss order is an order to sell a security when it reaches a certain price. This strategy will allow us to put some downside protection on some of these investments that have produced the largest gains over this year.
Should I Invest While the Market is High?
Over the past few years I have spent time as an intern here at Anchor Bay Capital, providing research and analysis on markets and investments. After graduating from Harvard University with a degree in Economics, I have now become a full-time member of the investment committee providing support to our Chief Portfolio Manager, Scott Spiering. I am a very passionate about investments and I am excited to be a part of this team at Anchor Bay. I look forward to sharing insight with you about our investment process and concepts that will help you better understand how to optimize your investment experience.
This month I wanted to discuss a question that has been more common as the stock markets continue to reach new highs. The question is: “Should I invest right now while the market is high, or should I wait until there is a market downturn to get into the market?” This question is a bit complicated because the answer largely depends on your personal situation. However, if you are looking at investing money right now with dollars that are not already in the stock market, it is a good time to discuss Dollar Cost Averaging as a way to start putting your money to work.
Dollar Cost Averaging- This is an investing strategy used by investors to allocate a fixed dollar amount to a given investment on a regular schedule. Two factors that often negatively impact the performance of an investor are bad timing and emotion. If implemented properly, dollar cost averaging can help take these out of the equation. Here is an example:
Let’s say an individual wants to invest, using dollar cost averaging, in ABC stock which is currently priced at $50 per share. They decide they want to invest $200 per month to this stock. In the first month, they would buy 4 shares with an average cost of $50. If the price then went down to $40 per share in the next month, then they could buy 5 shares. If the price in month 3 went to $25 per share, then the investor would buy 8 shares. At the end of the 3 months, they would have 17 shares for an average cost of $35.29 per share – much cheaper than the initial $50 per share.
Implementing a dollar cost averaging strategy forces an investor to stick to a regimented investing schedule, taking out questions about market timing. This is a useful strategy to think about given the current market climate. With stocks at or close to all-time highs, using a dollar cost averaging strategy of investing can help one stay focused on their long term financial goals, and not worry about trying to buy at the lowest lows and sell at the highest highs.