Is It Time to Panic?

Time To Panic? Not Now, Not Ever


By Roger Nusbaum


Global equity markets got hit hard last week with all sorts of things being blamed ranging from emerging market currency devaluations, to the Fed, to deteriorating market internals and a few other things. The Monday session, globally, essentially crashed. Shanghai (NYSEARCA:FXI) fell 8.6%, the Nikkei (NYSEARCA:EWJ) fell 4.6% and much of Europe was down mid-single digits as of their mid-day.

In this report we usually recap the week that was and while we will do that we will also offer a game plan for how to navigate the current market situation.

First the numbers; the majority of last week’s decline was of course on Thursday and Friday where the Dow Jones Industrial Average (NYSEARCA:DIA) fell 5.11%, the S&P 500 fell 5.20%, the NASDAQ gave up 6.19% and interestingly the Russell 2000 held up the best dropping 3.85%. Again those are just two day numbers. For the week the respective declines for those indexes was 5.79%, 5.73%, 6.71% and 4.57%.

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The foreign equity markets we usually follow here were all lower, most of which were down more than the US. The FTSE 100 fell 5.54%, the CAC 40 dropped 6.33% and the DAX fell 7.83%. In Asia the Nikkei fell 5.28%, the Hang Seng gave up 6.6%, the ASX 200 only dropped 2.65% and Shanghai fell another 11% perhaps over concerns of a lack of investor confidence, its currency devaluation and the fact that its PMI printed at its lowest level in six years probably didn’t help either.

Other news during the week that market participants were talking about included the 23% drop in the Kazakh tenge as well as the dollar’s ongoing rise against the Malaysian ringgit (8% over the last month) and weakness in the Thai baht which drew comparisons to the Asian Contagion of 1997. Greek Prime Minister Alexis Tsipras resigned after eight months on the job with hopes of being re elected in September in what is really more of a political tactic than a true resignation but does send a message of stability. The CBOE Volatility Index almost doubled last week up to 28.

The declines in equities had an interesting effect on some of the other asset classes; they did what they are “supposed to do” in that gold measured in US dollars rallied almost 4% and bonds rallied with the yield on the Ten Year US Treasury Note falling 14 basis points to 2.05%. Most of the yields in Europe were also lower on the week except for Spain and Italy which might be sensitive to the ongoing uncertainty in Greece. And of course West Texas Intermediate Crude’s 5.29% decline last week took a back seat to the decline in equities…almost.

The current decline when plotted out on a chart looks like a Black Diamond ski run. Declines of this magnitude in the course of a few days amounts to a panic and in moments of reason every market participant knows they shouldn’t panic. Now in a moment of market panic hopefully every market participant can remember they shouldn’t themselves panic. If you are reading this then you have been through at least one of these before in 2008 and you know what happened. It was the same thing that always happens. The market dropped a lot, it scared the hell out of a lot of people stayed down for a while and then went on to make a new high. This will be no different, the only variable is time; how long before a new high gets made.

As far as a game plan for the current environment it is important to understand that at any given moment there is a favorable case for equities and a negative case. Contributing to the negative case now is the deteriorating internals (you may have seen on CNBC that 143 S&P 500  components are down more than 20% and as of today that number will be bigger), the years of 15% price appreciation that came with 5% earnings growth (a point made by David Rosenberg), the duration of the current bull market, uninspiring economic data as well as the potential for the Fed to raise rates. On the plus side of the ledger there have been a handful of mid single-digit declines in the current bull market that proved to be buying opportunities, the Fed will still be easy if it raises rates in September, the collapse in energy prices should benefit most consumers and while economic growth has been weak there is unlikely to be a recession in the near term.

All of the above should lead to the obvious conclusion that no one can know what the market will do next. The simple solution is to simply stick to whatever strategy was laid out ahead of time when the market had not fallen 10% in three days. If this is the start of the next bear market then the bear market will last for some amount of time (about 18 months is a average length) then the bear market will give way to the next bull, will make new highs at some point in the future and then repeat the process.

This was true of the Great Depression, the mid-1970s, the tech wreck and the Great Recession. The details were different every time but the market manifestations were very similar. This means there are many valid strategies to confront this market and whatever is coming next with the understanding that if some valid strategy turns out to have been ineffective, it will be bailed out by time; see our recent blog post Time Is On Your Side.

Someone who has built a portfolio based on buy and hold no matter what (subject to rebalancing) should hold no matter what. Someone who has built a portfolio based on taking some form defensive action based on something like the 200 day moving average should have probably done at least a little by now. This is about portfolio discipline not predicting the future. The middle of an event (like a three day, 10% decline) is not the time to second guess strategy as emotions and uncertainty are likely to be heightened during such an event. Part of the reason to devise a strategy is to take emotion out of the equation when it counts.

Remaining disciplined is of course difficult. Holding on no matter what is going to be quite difficult when the market drops 30, 40 or 50%. Anyone taking defensive action last week will regret it if the market rockets higher from here or wish they had done more if the market goes down a lot from here. A particular strategy may not be the single best strategy for the current market event but can still be valid and get the job done. The worst thing that can happen is succumbing to emotion by deviating away from discipline.

ETF News & Data

Despite huge moves in the market averages the inflows and outflows were not that big. The largest move was $1.7 billion from a fund tracking the Russell 2000. The S&P 500 had a split week with one fund adding $500 million and another shedding $900 million. There were also positive flows into longer dated treasury ETFs in line with the drop in yields.

XTF reports 18 new ETFs launched last week including quite a few currency hedged foreign equity funds as well as two more O’Shares dividend ETFs from Shark Tank’s Kevin O’Leary.

Interesting Reads

Do you have plans this weekend? Gear Patrol offers the 25 Best American Microadventures which are brief trips that make the most of your time and the outdoors.

Microadventures, the adventures that fit into the 5:00 p.m. to 9:00 a.m. window, are overnight, day-trip or weekend adventures that don’t take excessive amounts of time or money. They also don’t take excuses. They’re the empowered times that you get outside. They’re not ascending the Himalayas or traversing the Amazon by foot. They’re waking up early on Saturday and hitting the trail. They’re returning to the shore at the end of the day for one more session of surf. They’re packing up the car after work and sport climbing limestone cliffs.

As a bonus interesting read, remember the ALS Ice Bucket Challenge? Well it looks like the money raised actually mattered. In a thrilling development researcher at Johns Hopkins believe they have isolated what amounts to the protein that malfunctions to cause ALS and they believe it is fixable.

The challenge, that was started by Pete Frates, who was diagnosed in 2012, raised $115 million for the ALS Association, and $77 million went straight into research.


ESPN had a fun article about the Biloxi Shuckers Endless 54 Game Road Trip. The team relocated from Huntsville, AL before the stadium was complete (it still isn’t quite done).

The Shuckers drop three of their last four to the Braves in Pearl and drag themselves back onto the bus. Half an hour into the 300-mile trek north on I-55 to Jackson, Tennessee, Brent Suter, a Harvard kid, somehow convinces his teammates that there is only one possible antidote to their mini-slump: Pitch Perfect. A chorus member at Cincinnati’s Moeller High School, Suter tried out for Harvard’s prestigious a cappella group but didn’t make the final cut. So he decided instead to focus on how to pitch, perfect. “I say this in all seriousness,” says Chris Harris, the team’s media relations director, radio play-by-play man, website manager and occasional grounds crew assistant. “Brent Suter has the legitimate voice of an angel.”

Sources: Google Finance, Yahoo Finance, Wall Street Journal, SeekingAlpha, Bloomberg, Reuters, Barrons,,, Bespoke Investment Group, ESPN


Weekly ETF Flows

For August 17th, 2015 to August 21st, 2015


S&P Sector Analysis

As for the sectors of the S&P 500, seven outperformed the broad benchmark – Utilities, Telecom, Staples, Healthcare, Discretionary, Industrials, and Materials. The remaining three – Financials, Technology, and Energy – each underperformed.  The dispersion between the top-performing and bottom-performing sectors was roughly 7.32% this week, with Utilities outperforming all, and Energy coming in last.

For August 17th, 2015 to August 21st, 2015

As measured by the S&P 500 sector indices, respective performances were: