Market Update – 2021 Sept 28

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by Franklin J. Parker, CFA

Rather than the regularly-scheduled weekly update, I feel that recent market gyrations justify a special and more focused update. Let’s first look at what prices are doing and how this fits in my short-term view. Then, let’s address how this affects our investment strategy.

Short-Term Market View

The past week and a half have seen stocks generally selling-off, with tech stocks leading the way. “Selling-off” is relative, of course. Despite all the drama, the S&P 500 was down less than 6% from its recent high, which is not particularly noteworthy. We get about a 4% selloff every month, and an 8% to 10% selloff about every year.

What is noteworthy is the change of character in stocks. The upward trend that has been in place since the beginning of 2021 was firmly broken last week (see chart below). That signals to me that, in the short-term at least, the S&P 500 (and stocks more broadly) may trade sideways for the next few weeks: bouncing between about 4460 at the high and around 4180 as a low (if I had to guess—emphasis on guess).

This is, by the way, quite similar to the pattern we saw in 2020. As the chart below demonstrates, we had a firm upward channel that had formed in the S&P 500’s price that was broken around September. That break began a sideways trading range that lasted about a month. Around November, however, markets began to again march higher and that formed the upward channel that we have been in since January of this year—the channel that was just broken.

Portfolio Strategy

While prices may move a bit lower in the short-term, this is not worth paying taxable gains to avoid by selling out of positions. At most, I could see markets selling down about 10% from their recent high, but that would still put our portfolios up for the year. Furthermore, as I mentioned above, I see this as short-lived, maybe a month to a month and a half at most.

Longer-term, I see both the Fed’s ongoing money-printing and the economy’s ongoing re-opening/expansion to put a tailwind to stock prices. Any pullback, then, is likely to be short-lived, in my view.

Investors, then, should use any pullback to deploy excess cash and/or rebalance their portfolios.

These short-term swings, as anyone will tell you, are notoriously hard to gauge. For investors who have longer time horizons, we really should not be too concerned about them—especially since the costs of attempting to avoid them can be excessive. Selling appreciated investments creates a tax cost. Getting back in at exactly the right time is very difficult as markets tend to reverse course quite quickly and often for no reason at all. That means we can be left in cash as stocks rally.

All-in-all, exactly how you position your investment portfolio will be a function of many things, most importantly your particular goals. For a market that has given few opportunities to enter at more reasonable levels, my bias is to see this as an entry point, not an exit.

I would, of course, be delighted to talk this through with you.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

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