2014 3rd Quarter Commentary
The Stock Market is dropping. What should we do?
As we publish this commentary on 10-15-2014, the DJIA stands at 16,141. On September 19th it stood at 17,279. So in the last month the Dow dropped 6.6%. Most of you are aware that we have been expecting this for some time. The Dow Jones Industrial Average regularly has intra-year corrections in the 8-10% range. Historically those corrections have occurred once every 12-18 months, and in the vast majority of cases the index has fully recovered within a year. We haven’t had such a correction for nearly 3 years. The reason we have mentioned a possible correction in our previous commentaries is so our clients would anticipate it and not be surprised.
We encourage our clients to be economic investors and not market timers. So we design portfolios understanding that these short term corrections happen periodically and knowing that each of our fund managers are building that assumption into their strategies as well. Consequently we don’t believe any action on our part is necessary at this time.
The reason we believe we are seeing a normal correction and not a long term financial crisis is due to the fact that the largest corporations in America are holding enormous amounts of cash. At last check the S & P 500 companies were holding over 40% to 60% of their net assets in cash. To drive home our point we would like to list some of the sectors in the S&P 500 along with their approximate percentage of net assets held in cash:
Sector % in Cash
Consumer Discretionary 56.6%
During the 2008 recession, a lot of companies were teetering on the brink of bankruptcy. Today the largest companies in the United States are very profitable and holding enormous cash reserves. When there are regulatory uncertainties that affect the way companies do business, they commonly hold assets in cash and wait until those uncertainties are resolved before committing their capital. As regulatory and legal uncertainties are resolved, we believe corporate cash will flow back into businesses and stimulate economic activity.
At Financial Professionals Incorporated we encourage our clients to be economic investors, because we believe eventually the stock markets will move in line with the economy. No one has ever been able to time the stock market. However, long term investments in the strength of U.S. and global businesses have paid off over the years.
The views expressed are not necessarily the opinion of Cambridge Investment Research, and should not be construed directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investing is subject to risks including loss of principal invested. No strategy can assure a profit nor protect against loss. Past performance is no guarantee of future results. Data for this information gathered from Morningstar. Indexes are unmanaged and investors are not able to invest directly into any index. Sources for this information include CNBC.com, The Kansas City Star, and the Wall Street Journal.
This material contains forward looking statements and projections. There are no guarantees that these results will be achieved.