It was a wild week for US markets. Volatility was off the charts and on Thursday the Dow dropped 512 points – its ninth largest single-day drop in history. Stocks are down about 7% from their peak in April and are now negative for the year. Then on Friday, adding insult to injury, Standard and Poors stripped the US of its coveted AAA credit rating (down to AA+). Of course, it wasn’t unexpected, the writing had pretty much been on the wall – you can find my previous comments on the matter here.
The question now is what will it mean for the bond market moving forward? In the ultimate scheme of things, and maybe surprising to some, it probably won’t mean that much. Markets tend to see things in relative terms, “better or worse” can have more sway than “good or bad.” Sure, debt problems may look bad in the US right now, however, are things worse than in other parts of the developed world, relative to Europe or Asia? I doubt it. In Italy, debt to GDP is 119%, in Japan, it’s a mind-blowing 220%! Figure 1 shows those percentages relative to the US.
Some blue-chip bellwether stocks were basically cheap for no good reason. 3M was trading at $42 (now $84), Boeing at $30 (now $62), and Apple with all its iPhones was under $100 (now over $370). Then again, there were plenty of well-known stocks that have not recovered commensurately, Walmart and AT&T for example. The point is opportunities to buy good companies at deep discounts are few and far between. With uncertainty mounting and volatility on the rise, the chances of encountering another opportunity are increasing
Of course, “stock-picking” isn’t a central party of my investment strategy. In my opinion, maintaining a properly balanced portfolio appropriate for your circumstances is more important than any stock pick will ever be. I see stock picking as a supplemental tool that can be useful in certain situations. It’s important to know how to use it and what to look out for, otherwise, we could end up getting smacked in the head with something unexpected. And if everything does get thrown out the window, the kitchen sink will really hurt!
Victor K. Lai, CFA
This blog is for informational purposes only. Nothing on this blog constitutes investment advice. Bellwether Capital Management LLC does not provide tax or legal advice. You should conduct proper due diligence and/or consult with your professional advisers before taking any investment action.
