I Don't Even Like Roller Coasters!

August 12, 2011

This is the time of year when people go to amusement parks. Well, for the record, I do not ride roller coasters anymore, and I do not like the ride the markets are taking us on these days (weeks, months). 

Take a look at these numbers as of close of business on 8/10/2011 for the Dow:

• 8/10 Down 519.83 points or 4.62%
• Down 11 of last 14 trading days
• 3 consecutive days of 400+ point moves
• The Dow Jones Industrial Average dropped 1.17% (127 points) in the last 30 minutes of trading on 8/10
• Lowest close since 9/23/10
• Down 3444 points or 24.3% since its record close of 14,164 on 10/09/2007
• Year to date: down 7.41%
  

These are some of the questions and issues the markets are dealing with:

• A dysfunctional Congress
• A jobless and very slow recovery
• A possible double-dip recession
• A zero interest rate Federal Reserve policy for two more years
• Will the Congressional gang of 12 be able to agree on anything?
• What does the downgrading of our debt to AA+ really mean?
• What impact will the Euro sovereign debt crisis have in the U.S.?
• Can anything be done to help the unemployment and housing situations?

I have opinions on all of the above issues, but I want to finish this newsletter without writing a dissertation. In the next few paragraphs, I will make several observations and comments.

1. The credibility of all the rating agencies is suspect, and the U.S. government is not in any danger of defaulting on its debt.
2. Equity markets are much cheaper now than in 2008, and corporations are making record profits.
3. Geopolitical uncertainty and sovereign debt concerns, especially in the Euro-zone, will be with us for years. In fact, France is the latest country in the spotlight for a possible downgrade.
4. Resolving the debt crisis in Europe, as well as the U.S., will be a prolonged and very painful process to watch. But it will most likely be resolved.
5. At the moment we are not on the verge of another recession. But slow growth is the norm and the economy is very fragile.
6. The rating downgrade will hopefully serve as a “wake up call” to Congress and prompt them to act in a credible way to reduce our debt to GDP ratio and secure our financial future.
    

What should investors do now?

It’s a natural reaction to be concerned – but don’t panic. It is critically important to understand that we have a long term investment plan in place for all our clients. And we all know that markets don’t go up every day, or every month, or every year. What is most upsetting currently is the volatility, the magnitude of the swings, and the acceleration of the 24/7 news stories on TV (cable TV). For the last week, CNBC has been running “Markets in Turmoil”. Do we really need this sensationalization by the media? An abundance of information does not lead to better decisions. Much of this market behavior is based on fear and emotions. Let’s not succumb to this!


With respect to your portfolio, it is important to note that we have already been positioning our clients more conservatively over the last few years. We hold many investments specifically because of their stable behavior in volatile and uneven markets. Times like these can cause discomfort, however, your diversification helps mitigate the overall risk.

In summary we are in for a bumpy, up and down roller coaster ride (which I don’t like). But let’s stick with our long term plan which we laid out over many meetings, and not overreact emotionally to this volatile market.

If you have any questions or concerns about your portfolio or any of these issues, please call.

Turn off the TV and enjoy the rest of the Summer!

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.