The U. S. stock market opened to the upside this morning (Tuesday, August 25) bouncing off yesterday’s close in a way that may encourage some investors that things are not really as bad as they thought only twenty-four hours ago. After trading in a narrow range for the last ten months, the stock market has declined 10% in the past week. This drop is being blamed on the economic slowdown in China, but whatever the reason, the quick sharp decline is concerning. The question on everyone’s tongue is could this downturn be as significant as 2008? Only time will tell.
To make important trading decisions and remove emotions, we depend upon short-term, intermediate-term and long-term charts. Over the past several days, these charts have changed and suggest that there is a need to focus on capital preservation. No one knows where this market will be in a week, six weeks or at the end of the year. There are plenty of predictions and advice ranging from the conventional “stay the course and keep a long term view” to the opposite pole of “the end of the world is at hand.” We believe predicting is folly, and we are not in either camp.
We know that “Hold and Hope” is not an investment strategy. We make measured decisions based on current market conditions and when the market changes, we change. Given the status of important indicators, it is our opinion that it is prudent to take a defensive strategy.
Over the past few weeks as the charts turned negative, we raised cash in our clients’ accounts to preserve gains, minimize losses, and prevent potential future large losses. It is important for investors to know that bonds may or may not be a safe haven, and those who turn to bonds from stocks could see larger than expected losses in bonds. If the Federal Reserve continues on its stated path to raise interest rates, bonds are likely to drop in price as interest rates rise. Cash is an asset class and it is the only asset class that offers protection from market losses. Increasing the cash level in accounts has proven to be the safest strategy in volatile uncertain times.
After the declines of the past few days, the market is extremely oversold and a bounce is likely, and in a defensive posture, the bounce offers an opportunity to sell and move money to the sidelines. Cash serves two purposes. First, it is a safe place for money until the turbulence in the stock market subsides, the global uncertainty is resolved, and a positive trend resumes. Secondly, cash means money is readily available to buy at lower prices when the market returns to an uptrend. Cash means there is money to invest another day.
This market decline is worldwide, and world markets need time to digest the economic troubles in China. Slowing growth in China means less demand for raw materials and declining commodity prices. It also means potentially reduced demand for U. S. goods, as China is one of our trading partners. China is attempting to stimulate its economy, but so far efforts have not been successful. Given a lack of transparency, it is challenging for the U. S. and other western nations to truly evaluate the extent of China’s economic troubles.
The tepid recovery from our own recession and what some describe as a fragile economy here at home, make this downturn in the stock market more concerning. It is our decision that a defensive strategy is timely.