Thursday was a tough day for stocks to say the least. Overall, stocks as measured by the S&P 500 declined by -4.71%, which marked the worst one day performance for stocks since before the March 2009 lows.
The primary driver for the sell off was the situation in Europe. In recent days, Spain and Italy, which both rank among the twelve largest economies in the world, have come under increasing pressure due to their government debt problems. The European Central Bank held a meeting today where it was hoped that they would provide some clarity on how they would address the problems in these two ailing countries. Instead, they managed to perplex the market with several policy decisions that were widely inconsistent with recent actions and out of step with the views of Eurogroup leaders and the International Monetary Fund. This sparked market concerns that confusion and lack of coordination among European leaders may result in the current crisis eventually growing out of control. From there, the stock market rout was on.
Fortunately, portfolios were prepared for today's events. While money was draining out of stocks, it was flowing into U.S. Treasuries. As a result, a heavy portfolio weighting to Treasuries added considerable value. For example, longer duration U.S. Treasuries (maturing in over 20 years) gained +3.56% today, and other areas of the Treasury market also rose +1% or more. This helped meaningfully offset the impact of the stock market decline. And although Gold sold off today, its decline was only -0.53%. In total, any declines in portfolio value were limited to considerably less than -1%.
Looking ahead, today's stock drop had the feel of liquidation selling by financial institutions and hedge funds, which was a common occurrence in late 2008 and early 2009 during the days following the outbreak of the financial crisis. Supporting this idea was the fact that several stocks were actually up in the late morning, but ended the day down -5% or more. Such volatile price activity is a sign of sellers being forced to liquidate into a stock market where there's not enough buyers to pick up the slack. And when such liquidation selling gets underway, it's unpredictable to say exactly when it's going to end. But the stock market is now oversold - it has gone down too far, too fast - and many high quality stocks are now considerably less expensive today than they were just a few weeks ago. Thus, this sell off should provide the opportunity to add selected high quality names once the stock market finds some stability. The only question is whether this stability comes at 1200 on the S&P where it closed today or at an even lower level before its all said and done. The next few trading days will tell us a lot in this regard.
The primary driver for the sell off was the situation in Europe. In recent days, Spain and Italy, which both rank among the twelve largest economies in the world, have come under increasing pressure due to their government debt problems. The European Central Bank held a meeting today where it was hoped that they would provide some clarity on how they would address the problems in these two ailing countries. Instead, they managed to perplex the market with several policy decisions that were widely inconsistent with recent actions and out of step with the views of Eurogroup leaders and the International Monetary Fund. This sparked market concerns that confusion and lack of coordination among European leaders may result in the current crisis eventually growing out of control. From there, the stock market rout was on.
Fortunately, portfolios were prepared for today's events. While money was draining out of stocks, it was flowing into U.S. Treasuries. As a result, a heavy portfolio weighting to Treasuries added considerable value. For example, longer duration U.S. Treasuries (maturing in over 20 years) gained +3.56% today, and other areas of the Treasury market also rose +1% or more. This helped meaningfully offset the impact of the stock market decline. And although Gold sold off today, its decline was only -0.53%. In total, any declines in portfolio value were limited to considerably less than -1%.
Looking ahead, today's stock drop had the feel of liquidation selling by financial institutions and hedge funds, which was a common occurrence in late 2008 and early 2009 during the days following the outbreak of the financial crisis. Supporting this idea was the fact that several stocks were actually up in the late morning, but ended the day down -5% or more. Such volatile price activity is a sign of sellers being forced to liquidate into a stock market where there's not enough buyers to pick up the slack. And when such liquidation selling gets underway, it's unpredictable to say exactly when it's going to end. But the stock market is now oversold - it has gone down too far, too fast - and many high quality stocks are now considerably less expensive today than they were just a few weeks ago. Thus, this sell off should provide the opportunity to add selected high quality names once the stock market finds some stability. The only question is whether this stability comes at 1200 on the S&P where it closed today or at an even lower level before its all said and done. The next few trading days will tell us a lot in this regard.
This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.
