Pullbacks Are Inevitable

To start the year the S&P 500 had been down .77% and 4.17% from the high reached on December 6th as of Monday. By any historical standard, we believe the correction we’ve been undergoing thus far is quite mild and may not even be considered a correction but more like a speed bump. I’ve had the privilege of sitting 3 feet away and working alongside Quint these last 5 years and one thing he always repeats is how a pullback (temporary decline in the overall price of the market), while necessary, always feels worse than it actually is. While never fun, pullbacks are inevitable and all part of the longer-term process of eliminating exuberance which had become overwhelming in the last few months. What’s interesting about this pullback in our opinion is just how quickly, once again, the sentiment shifted from greed to fear. We see that as an indication that the longer term bull market is in fact alive and well.?

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While fundamentals remain strong and companies are doing quite well, one of the indicators Quint and I have been looking for, to tell us where we are in the longer-term uptrend, is how investors react during each and every pullback. Quint has often shared how it would be concerning if during a pullback, investors were ready to increase risk and take on more exposure, rather than what we’ve been seeing of late where investors are much more concerned about further downside than the opportunities this pullback may be presenting. While this may seem counterintuitive it is one of the ways in which we’ve always measured the state of the general market.?

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What’s interesting to me is that what investors originally got quite excited about last year, the election, is close to coming to fruition with inauguration upon us within a week. Despite the fact that our government will look completely different in just a few short days, something markets have been anxiously anticipating, the rise we saw immediately following election results has been eliminated with the S&P returning to the level it saw at the close of business November 5th. Unfortunately, those that chased stocks on election results are probably not very happy.?

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Sometime around the middle of last year we underwent our first of multiple portfolio changes reducing risk and increasing our cash and cash equivalents. We’re now in the fortunate position of having dry powder (cash kept on hand for future investment) at the ready should stocks continue to present strong opportunities. Needless to say, we’re looking at putting some of that capital back to work in the near future.?

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While Quint has been traveling, it has been a great experience holding down the fort and despite his intentions of getting away, we’ve been chatting every day about the market action, economic backdrop and next week’s inauguration. Yes, we’ve been chatting UK basketball as well but who can blame us!??

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In our opinion, the thorn in the side with markets continues to be rising interest rates, despite the Federal Reserve’s best intentions. While the shortest term rates, controlled by the Fed have dropped, the longer term rates controlled by the general bond market have continued to rise. It is these rates that represent the true borrowing costs for consumers and corporations, think mortgages and business loans. We suspect this will be the new administration’s first line of business to address, even if it doesn’t make above the fold headlines. If longer term rates do not fall soon, it is our opinion that we can forget about the bull run in stocks continuing and our country will face considerable headwinds due to our incredible debt levels. It is something we’re watching closely and feel the timing with peak rates and the upcoming inauguration may be quite fortuitous.?

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In summary, in our opinion, pullbacks are never fun. Like turbulence on a flight they are unfortunately all part of the process and come with the territory. However, we do not believe this is the end of the bull run but rather an opportunistic pullback that we are looking to take advantage of with our increased cash levels.?

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We hope you’re staying safe and warm this winter and should you have any questions or need assistance with anything, please don’t hesitate to let us know as we're ready to help.?

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It looks like our office move is coming along nicely and will transpire sometime in February. While long overdue, we’re excited to welcome you in our new digs soon!

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Best,

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- Logan Gilland CFP?

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