Investing is a privilege. Hundreds of thousands of people do not make enough money to save and then, invest; others do not really understand the relevance of investing. I have always talked to my kids about the miracle of compound interest; once you comprehend that concept, investing is almost addicting. Investing in a smart way is also a privilege; nowadays, with the online courses, almost everybody have access to finance courses for free, sometimes taught by the best professors in the world; with the internet ,there are plenty of information about the world economic conditions and there are plenty of tools for those who want to invest. I am talking about the small investor because for the big ones, the resources have always been there.
Nonetheless, the investment field is not a plain field. When one sees what has happened in the stock market in the first four months of 2014 (below), it is easy to see the traps that are out there.
I’ve never enjoyed a roller coaster and have never been in one; just the thought of it makes me dizzy. The US stock market, as you could see from the chart above, with the movements of the S&P for April 2014, looks exactly like a roller coaster. That is why I choose April to arrange my files and ignore the stock market.
At the same time, it was very entertaining to read or listen to the analysts’ explanation for the movement: one day the Putin speech justified the movement down, the next day was Obama’s response to that speech that explained it; one day was the rotation of stocks, the other day was the speculation about what Janet Yellen would say. A possible bubble in tech or biotech stocks came to play and of course some of the blame went to the HFT (High Frequency Traders) also. I understand that newspapers are published every day and the pages have to be filled, but maybe a little creativity would serve well the journalists that follow the market. Honestly, I, myself, don’t have an explanation for such swings, of why is happening and when or if it will stop. So my answer to that is just stay the course and focus on the fundamentals.
2013 was a very good year for the stock market so we have a tendency to forget that although low, there was volatility ( see below) .There is always volatility, there is no such thing as a continuum upwards movement(or downwards).
The beginning of 2013 was also volatile, as we can see below with the chart for the period March, 22- April, 22 2013.
What is my point with all this charts? My point is that volatility belongs to the stock market but we have to identify the general trend and as I see it, the trend of the stock market now is to go up; we are still in a bull market. My point is a repetition of my mantra since the beginning of 2014: the American economy is improving, the economic indicators are positive; interest rates are still low, very low, providing the companies with a very cheap way to finance its operations. Janet Yellen, in her first speech in NY last week stressed that the FED will continue to do whatever is in its power to support the recovery, even revert the tapper, if necessary.
The earning season is on again, and so far so good. On the other side, excluding the real estate market that is very hot, there are no good choices for the investors. Talking about the real estate market, in NY, there are more than 100 new developments in the pipeline in the next few years. The average price of an apartment in NY is up 30.9% when compared to a year ago. This increase in prices is far-reaching, for new and old buildings, for condos and co-ops. The inventory is still low and demand is growing so, it is possible that this movement in prices continues for a while, or at least until the new developments are completed. But that is not an option for the small investor.
There is really nowhere for the small investor to put his money. If you want to beat the inflation, invest in stocks: improvement in the economy+ positive earning= higher prices. It still amazes me how difficult is for certain analysts to admit that we are living a virtuous cycle in the States.
This virtuous cycle is widening and is getting to Europe. Spain, Italy and Greece are back to the bond market, financing themselves at rates pre crisis, rates seen before “PIIGS” had become an alternative word for “problems”. The European Central Bank already said that will do whatever is necessary to keep the economy growing or in their case, to avoid stagnation. China is not a source of good news lately but someone has to tell the analysts that the US can growth regardless of what is happening in China- differently from Brazil and other countries who are exporters of commodities.
So, April volatility occurred at the same time that good economic indicators were being announced in almost all corners of the economy: confidence, retail sales, new orders, jobs and inflation. That is why, I, like many others have difficulty explaining why the market is so volatile. I may not know the reason but I know that the investors have few choices:
1 - Stay out of the market and see your capital shrink over the years.
2 - Try to time the market, buy when is low, sell when is high, a strategy that rarely works.
3 - Sell your stocks – another version of sell in May and go way- and go to a beach to recover from the long winter.
4 - Stay the course: keep your focus in the long run trend and do not worry about volatility.
I pick number 4 and advise you to do the same.