A large number of investors, talking media heads, and Wall Street analysts are predicting that the US toward another recession. Even the mention of the 'R' word (recession) sends fear through not only investors blood, but nearly all American's.
Why? Because soon after hearing the word most people begin remembering 2007-08 financial crises which sent the US economy into a 19-month recession, which to make matters worse from a psychological standpoint has been coined 'The Great Recession'. Furthermore, since the 2007-09 recession is still fresh on everyone minds and was terrible in terms of job lose, declining economic activity, low 401-K balances and stock prices, when the 'R' word is used now, everyone immediately thinks of all those terrible things happening again. This causes fear and panic to quickly set in.
From a market standpoint, this can send equity and commodity prices lower, further increasing the likelihood of a recession. (Think self-fulfilling prophecy.)
But let's stop right there for a moment and look at what is really happening with the markets. Currently, the Dow Jones Industrial Average Index (DJI) is down 10.75% year-to-date while the S&P 500 Index (SP500) is down 11.15%. Alright, so the markets down slightly more than 10% since the start of the year! This should not be considered a recession, but a market correction.
From a historical perspective, the markets experience a correction, a fall of 10% or more, once every 357 days. So that is once a year, on average the markets have fallen more than 10%. Prior to the current correction, we are experiencing, the last 10% decline happened roughly 1,100 days or three years ago. To say we were due for a correction is an understatement. Furthermore, one study showed that between 1945 and 2013, the average correction amounted to the market falling 13.3%.
Now to the good news about market corrections. First, the same study mention above showed that the average correction lasted just 71.6 trading days. So while a typical correction happens once a year, they only last for about 14 weeks or just slightly more than one-quarter of the year. Again looking at history, the odds of the market being lower than where it stands today in five years from now is only one out of five, or a 20% chance. For longer term investors, there has never been a 20 year period, regardless of when you got in the market when stocks lost money during that time. This is even when taking into consideration inflation.
With that information at hand, regardless of whether we are heading toward a recession or not, you should still keep investing. So let's talk about where you should be putting your money today.
I am always a fan of keeping it simple and stashing money away in an S&P 500 Index ETF such as the SPDR S&P 500 ETF (SPY). With the SPY, you get the top 500 US companies (so no surprises about what you own), low fee's, a 2% dividend yield; so basic exposure to the equity markets. If you are someone who just wants to put money to work in the markets, doesn’t want or have the time necessary to pick individual stocks, the SPY is the way to go. Regularly plug money into it and forget about it until you're ready to retire.
If you are a little more hands on, but still don’t want to jump into individual stock picking, no problem, there are thousands of exchange traded funds you can get into which will allow you to focus your assets on particular industries. Two industries I find interesting right now are the energy or oil and gas sector and technology stocks. I like being a contrarian investor, so with depressed oil and gas prices and most investors running away from the industry, I see opportunity. The same can be said with technology stocks, as we have seen the big leaders in that sector getting bashed by the markets. Apple, Amazon.com, Netflix, Tesla, Twitter, GoPro, Solar City; just look up and down the NASDAQ and you will find tons of tech stocks that have been crushed over the past few weeks.
But, before you jump into these two industries, we need to remember, there is a reason some of the stocks in those industries are down, besides just that the low-tide is bringing all boats down. For the oil and gas stocks, the smaller companies with more debt and higher production costs are in bad shape. But, the larger, older companies in the industry will be able to ride out the low commodity prices and will likely be stronger when prices again go higher, someday. With tech, it’s the same thing. Twitter is losing users, GoPro shows signs of market saturation, but Netflix is still strong, Amazon is still growing rapidly.
So two ETF's I like in the energy sector are the Guggenheim S&P Equal Weight Energy ETF (RYE) and the iShares U.S. Energy ETF (IYE). The Guggenheim tracks an equal-weight index of the US energy companies that reside in the S&P 500. That would indicate it is only buying the larger energy producers, whom shouldn't be as affected by lower commodity prices as others in the industry. It currently holds just 40 companies. As for the IYE, this ETF tracks a market-cap-weighted index of US energy companies as classified by the Dow Jones. So, similar to the RYE, but this ETF holds 82 companies, which increases your risk, but also can increase your upside potential.
As for technology ETF's, I currently again like the Guggenheim S&P Equal Weight Technology ETF (RYT) and the SPDR FactSet Innovative Technology ETF (XITK). The Guggenheim tech ETF is just like the energy one; it invests in companies found within the S&P 500 that are in the technology sector. The RYT currently holds 69 stocks. The XITK is much more risky, as it invests in companies that have been deemed innovative or disruptive by FactSet. This is a brand new ETF, with an inception date of 1/13/2016, so we don’t have a ton a data on the ETF, but these are the stocks that have been hammered lately, and could potentially change the world. Big upside, but big downside also.
Final Thought
At the end of the day though, the biggest issue is that the 2007-09 recession is still very fresh in everyone's minds and it was the last recession that we can compare things to. This thinking needs to be changed, as it is very unlikely we will have another recession as bad as the one we experienced a few years ago anytime in the near future. So, relax, stop panicking, the world is not coming to an end, stop selling equities, and go on with your life as you would if equity prices were rising, because they likely soon will be.
Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513
Disclosure: This contributor held long positions in Apple, Tesla, Intel, Google, Amazon.com, Facebook, Priceline and Microsoft at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
Every time I want to start investing I see articles like this and then I just sit on my money piled in a corner.
Probably not the best strategy but at least I'm safe.
Hello John Kane,
I apologize if the article has increased your level of fear, it was intended to help lessen investors worry and anxiety about recessions and falling equity prices. But, thank you for reading and hopefully in the future I am able to accomplish that goal.
Happy investing,
Matt Thalman
Why is the US dollar so relatively strong? China and Japan are selling off their treasury holdings, the Fed flirts with negative rates (investors pay to have an institution hold their paper money-not a vote of confidence in the currency),
recession is more than likely (particularly with a big change coming to Washington). Yet the dollar remains strong. Is it that the rest of the world is so pathetic? Anyone got a clue?
It's all relative -- the dollar is measured against other currencies, all of which are losing value. The dollar is "the least dirty shirt" in the laundry basket, and so looks strong in comparison.
The dollar is stronger because China for example is bumping more money into their economy, ie printing money, as a way to help strengthen its own economy. By putting more money into the system, it devalues what is already out there (think basic supply and demand) when it is measured against other currencies.
As Lord Koos stated, the dollar will increase in value while others decline since they are all measured against one another. The US did the same thing China and other countries are doing now, during the 2007-09 recession and the following years when we were printing money like crazy and dropping interest rates.
On a world-wide scale, if your currency is weak, compared to others, it is cheaper for others to purchase your goods and services, thus increasing your own economic activity. A strong dollar vs a weak Yuan means we can buy more of their stuff, helping their exports. But the other side of that is when we are trying to sell stuff to the Chinese those items are more expensive for them to buy, hurting our exports.
There are two sides to every coin.
Hope this helps and happy investing,
Matt Thalman
Matt, I appreciate your sensible, no-nonsense and centered article, it's very helpful to have a clear explanation and a cold head in this sea of volatility!
Thank you
Michel
Well Michel,
Thank you for reading.
Happy investing,
Matt Thalman
GOP won 2010 election. Market "corrected." GOP won 2014 election. Market "corrected." GOP wins 2016 election, I'm outta the market just like I was in 2001. Simplistic? Perhaps. Works? Yep. GOP poisons the economy whenever it gets the chance. The one time it didn't work that way, the crazy actor went on an insane deficit spending spree, and unsurprisingly, blamed it on everything but his crazy military spending and tax cuts for the rich. Dubya doubled down, started two wars to divert attention from his getting caught with his pants down, tanked the economy. Only place it didn't hold was in the Great Depression when Hoover, who was the pick of and the third of a bad lot, got blamed for the mess created by the other two.
Dear Matt,
Either you are over optimistic or you have totally ignored factors and situation taken place in Gold, Crude and Stocks world wide.
Probability or question of recession is not just limiting for US only, China, Japan, EU, Gulf, Russia, Asia, you just name the Country, and you can observe same recession based fear factor in all most countries across the glob, and we find them caught in this blunder and facing recession type factors, that is too, without any official deceleration therefor.
You must point-out that Currant period seems even more harder and harsh then of the earlier 2007-2008, because at that time, first, sub prime related Disaster taken place, and then after it's effects like job lose, declining economic activity, low 401-K balances and collapsing stock prices, etc. etc. were wide spread, but at this juncture, first we have already found falling Gold, Crude and Stocks without any remarkable, related, declared or announced disaster, so we must be mentally prepared for any such worst event or series of events.
Now you can imagine that what will be the situation when any such financial disaster will took place actually, and how will that impact us.
One may very surly get the best return from the stocks, When he is ready to invest for 5 -10 - 20 or for even more years, but it dose not mean that on such a basis, current or probable future risk should be ignored or may neglect probable opportunity to invest at some more bargain rate.
Hi Rasesh Shukla,
Thank you for reading and your insightful comment. On the topic of recession's, because we now live in a time of interconnected world economies, I agree the possibility of one occurring is not limited to just the US, but other major countries, and if that happens, it could affect the markets here in the US and other places.
But, again if there is a recession coming, which I am not saying there is or isn't one coming, the point I am trying to make is you should keep investing.
The study of the markets have shown us, we are not good at predicting the future, so accurately timing your ins and outs, is extremely difficult at best. Case in point, you mentioned oil. Oil prices were over $100 a barrel, NO ONE predicted them to fall as low as they are now, but because of supply and demand imbalances they have fallen to $30 a barrel (which I believe is a good thing, maybe I missed read your comment, but you made it sound like it was a bad thing). As for stocks falling (again you made this sound like a bad thing, which I would agree it is never good when stocks fall), there is a strong argument that can be made they were simply overvalued (based on the S&P 500 PE ratio, currently at 21.27, historical mean of 15.57 and median of 14.61) )and as I mentioned above were due for a correction, not the worse thing in the world and part of the general market cycles.
But again to my main point, invest regardless of what is happening with the market. As of today, the major indexes have recovered all of their February loses and the DOW is now only down 5% year-to-date, compared to a previous 10% drop. In other words if you sold anytime in Feb or worst case on Feb 11 when the DOW was at 15660 and have stayed out of the market since then, you have missed out on the rally up (or a 792 point rally, 5% gain if you sold on Feb 11) because you were fearful of a possible recession.
At the end of the day, there are always hundreds of different fear driven reasons to stay out of the market; a recession, a war, low oil prices, low commodity prices, low stocks prices, political unrest, you name the reason, but at the end of the day, if you invest and just leave your money in the markets for long periods of time, you will make money.
Happy investing,
Matt Thalman
Dear Matt Thalman,
Thanks for such well covered reply. Accordingly, please note that I agree with “Remain Investing” because Being a natural characteristics of on and average investor, nobody want to sale at highs, and buy at lows, this phenomena observed worldwide and for all financial or other markets, and most players, either they are investor, trader or speculator, but they always try to catch Tops and Bottoms only, but unfortunately, they never achieve their such hypothetical Goals. On the other side, “Remain Investing” shall and must be very strictly followed, subject to certain related conditions, because either for trying to catch Tops and Bottoms or just investing without considering current situation or future probabilities both are equally meaningless and harmful. As a Conclusion, we can point-out that we have to manage investing in the form of Middle of such both above factors, and to capture Big Gains, long term perspectives are essential.
Now about Crude Oil, I am surprised to find your comment like “NO ONE predicted them to fall as low as they are now,” because just on this INO Traders Blog platform, since 2013, I had repeatedly and very clearly predicted fall of Oil, you may check some of my past following Posts.
https://www.ino.com/blog/2013/06/potential-oil-glut-raymond-james-analysts-contrarian-forecast/comment-page-1/#comment-168963
https://www.ino.com/blog/2014/10/the-real-reason-why-crude-oil-is-moving-lower/#comment-261717
https://www.ino.com/blog/2015/08/oils-slippery-slope-how-far-will-prices-fall/#comment-306412
https://www.ino.com/blog/2015/02/4-reasons-oil-could-drop-further/#comment-294283
With Regards,
Rasesh Shukla.
Hello again Rasesh Shukla,
Thank you for pointing out that yourself and others had in the past called for oil to fall. I commend you for having the foresight to see that coming.
Now not to nit-pick, but the point I not so clearly made in my comment was that while some, yourself included, were calling for lower prices, the actual bottom (or at least the prices we are seeing today, $30 a barrel) was not correctly being predicted at the time oil sat at $100 a barrel.
Again as a whole, investors are not good at calling the true bottom or true top and trying to time those accurately is very difficult. Thus investors are more lose money or at best leave money on the table when trying to make specific market calls.
So back to the point of the above article, I don't believe selling stocks now, because one fears the market may fall further or we are heading toward a recession is a good investing strategy.
Again Rasesh, thank you for reading and all of your very insightful comments as these type of discussions only make us all better investors,
Matt Thalman
now finally, i want to ell you only one thing that i observed and appreciate your politeness with very open mind to share views. Not only to me, but rest all bloggers are replied by you in the best possible manner. let continue your study, i am wishing you all success for that.
Rasesh Shukla
"Regularly plug money into it (SPY) and forget about it until you are ready to retire." I fired this type of guy last May and sold everything. If you point out the flaw in their logic they genuinely feel sorry for you. I think they have a place in society, but not in giving financial advise though.
Hello Mark,
Thanks for reading and thank you for your comment. The point of the article and especially the line that you have highlighted is trying to make, is that panic selling when the market falls is typically a bad idea because history shows us the markets will bounce back. Also, on a side note, the majority of investors don't have a good track record of buying and selling at the most optimal times, but we can leave that discussion is for another time.
Furthermore, the line directly before the one you have highlighted is important to the statement; "If you are someone who just wants to put money to work in the markets, doesn’t want or have the time necessary to pick individual stocks, the SPY is the way to go. Regularly plug money into it and forget about it until you're ready to retire." If you are just trying to save money for retirement and don't have any interest in following the daily, weekly, moves of the market, than the best thing you can do is regularly buy the SPY (on a weekly or monthly basis, whether it is up or down) and let it do its thing. As I explained prior to those statements in the article, over the long run, history has shown you will make money with that very simply, basic investing strategy. Plus, by doing it yourself and buying an index fund such as the SPY, you will keep your investing costs very low. With that being said, I commend you for letting your adviser go if that is what he told you to do, because it would have been much more expensive for you to pay him to do what you could easily do on your own.
Hope this helps and happy investing,
Matt Thalman