Is Dow 13,000 - 15,000 on the horizon at the rate of this plunge?

[Which Roger]

I'm very surprised, almost shocked, that there is so much of this kind of discussion and sentiment on the ER forum. I thought the vast majority of us were like me: "The market is smarter than I am, so my asset allocation allows me to sleep at night and I tune out the noise and stay the course".

 

[38Chevy454]

Well, there certainly needs to be some good news coming out of Washington soon in order to avoid a "manufactured recession". If enough of the population gets slammed due to job losses and other negative economic events, they could stop spending money and things will go into a tailspin.

Agree, since such a large portion of the US economy is based on consumer spending.


The other problem is that negative news tends to cause more negative news to continue the cycle. Perception is reality for the general public, whether the fundamental basis supports that perception or not. I tend to think the fundamental basis is still healthy enough, so do not see dropping down to OP's 13000-15000 level. I can see some additional drop before it bottoms, and then staying flat for a while until the negative news trend diminishes and starts to become more positive and subsequent increasing market values.

 

[trapperjohn]

Someone earlier said that this is a great time to buy stocks on sale. It’s an equally good time to do Roth conversions ... rolling $$ from your pretax IRAs into Roth’s and paying the appropriate tax.

 

[cyber888]

I sincerely doubt it'll be a straight drop. There are usually big upward bounces during downturns. But for me personally, the range the OP mentions (DOW 13k - 15k) is about the range where I'd start putting my $$$ back into the market, and if it does't get close to there, then I guess I'll be a fixed income investor for a very long time. In most full cycles (not all) the broad indexes dip below the peak from the previous bull. The previous bull market peaked at around Dow 14,000.

Man, you got a nice signature there .. Professional Fed Bubble Spotter [emoji16]

 

[imoldernu]

This article points to a unnerving question. The Mnuchin banker discussion.

https://www.theatlantic.com/ideas/archive/2018/12/whats-behind-steve-mnuchins-press-release/578968/

This is roughly what happened on Sunday evening, when Treasury Secretary Steven Mnuchin put out a press release on calls he held with executives from the country’s largest banks. Mnuchin’s statement assured the public that they had not been having liquidity problems or “clearance or margin” issues—the sorts of things you would worry about if the country were on the brink of a financial crisis.

For those who weren't involved, this discussion of the 2008 bank bailout.

https://www.thebalance.com/what-was-the-bank-bailout-bill-3305675

Bad judgement, or simple misstep?

 

[Rianne]

This market action might be the grease that gets the trade talk wheels going. If so next year could be very profitable.

Yey, it makes me think of Trading Places. Time to buy.

 

[RAE]

2 years is a long time, anything can happen. What indicators point to a recession in the next year?

Here are a couple. Not saying they guarantee a recession next year, but they are certainly not positive indicators or trends:

"US Household debt hits record high 13.5 trillion last quarter":

https://www.nbcnews.com/business/co...ecord-high-13-5-trillion-last-quarter-n937216
_______________________________________________________________

For most U.S. workers, real wages have barely budged in decades

"...today’s real average wage (that is, the wage after accounting for inflation) has about the same purchasing power it did 40 years ago. And what wage gains there have been have mostly flowed to the highest-paid tier of workers":

For most Americans, real wages have barely budged for decades | Pew Research Center

 

[RAE]

The other problem is that negative news tends to cause more negative news to continue the cycle. Perception is reality for the general public, whether the fundamental basis supports that perception or not.

This is very true, and we are seeing this happen right now, IMHO. The underlying economic fundamentals may not be that bad (although I do think there are some fairly serious problems there). But, with the daily barrage of bad/bizarre/shocking/baffling (pick your own word) news coming out of DC lately, it almost has to influence a lot of market investors, many of whom are already nervous. What we need right now is strong leadership and a calming influence to help right the ship. Until we get that, I see problems ahead.

 

[PatrickA5]

Around 50% of the U.S. population doesn't own stocks, so a lot of people don't really care about what happens on Wall Street. To that 50%, jobs are the most important thing. They will keep on spending as long as they're employed. My hope is corporations won't freak out about their stock prices to the point where they have big layoffs "just in case" there might be a recession down the road - which might cause the recession.

Oh well, nothing I'm going to overly worry about. I'll stick with my 50/50 allocation and might even buy a little if it drops much more.

 

[njhowie]

It's only a "disaster" because the market has become an addict of the Fed socializing losses. I still don't comprehend how people think the market actually recovered when central banks have been creating money out of thin air to buy trillions of assets as recently as 2014.

You and I are always on the same page.

 

[RAE]

You and I are always on the same page.

+1, count me on the same page with you both, in regard to this topic.

 

[njhowie]

My hope is corporations won't freak out about their stock prices to the point where they have big layoffs "just in case" there might be a recession down the road - which might cause the recession.

Forget your hope, mass layoffs already begun.

https://www.cnbc.com/2018/12/20/reu...abroad-after-u-s-layoffs-government-says.html

https://www.cnbc.com/2018/12/11/reu...out-2-bln-in-charges-for-planned-layoffs.html

https://www.cnbc.com/2018/12/04/reu...-workforce-by-3200-or-12-percent-by-2020.html

https://www.cheatsheet.com/money-ca...right-after-getting-tax-cuts-from-trump.html/

https://www.autonews.com/article/20...nlike-2008-gm-cutting-jobs-plants-proactively

https://www.bloomberg.com/news/arti...cut-salaried-jobs-in-11-billion-restructuring

https://www.theguardian.com/us-news...s-record-profits-layoffs-outsourcing-continue

 

[audreyh1]

With short to intermediate TIPS looking attractive to me (over 1% real return), I temporarily have shelved the investment grade to Treasury swap strategy. All my movements are in retirement accounts so no tax consequences.

Regarding that swap strategy, the yield curve would have to get flatter to make that Treasury move. It is not a strong function of the yield curve but I'd look for the 10 year - 3 month Treasury slope to drop to about 40 basis points and it was 64 bp last I looked.

You just don’t know how much the long end of the yield curve is being pushed up this time due to the QE unwind.

But it seems like if you wait for the curve to flatten, the corporate spreads will already have widened, capturing some losses in corporate bonds.

If you already moved to TIPs I guess you are ahead of that game.

 

[audreyh1]

So, can someone explain to me why when markets go down your % change. Don't you still have so many shares of equity funds and so many bond funds? The price goes down but don't you still have the same number of shares.

So, if no rebalancing is done, and markets start to rise, then you come back up, then the equity % comes back up to where it was at, right?

I have always just bought and held. I hope this is an embarrassing question for me. LOL

Yes you own the same number of shares, but their value changes. The AA depends on the $ value of each asset class.

If the equity market drops 20%, and you own 50% equities, assuming your fixed income didn’t go up (it usually does) your portfolio is down 10%, and now you are at 44% stocks and 66% fixed income, so you sell some fixed income and buy some equities to get back to 50/50.

If you didn’t do any rebalancing, but waited for equities to go up 25% you would also get back to 50/50. But your rebalanced portfolio would get there a bit faster.

 

[timbervest]

Remember its all about cashflow. If your cashflow is covering your lifestyle. you don't have to liquidate capital, and you plan to live another 10 years from here you probably shouldn't worry. The only people who lost money in 2008 were those who sold.

 

[redduck]

Well, there certainly needs to be some good news coming out of Washington soon in order to avoid a "manufactured recession".

Why would we want to avoid a "manufactured recession?" I though we were trying to increase our manufacturing capabilities.

 

[cyber888]

You and I are always on the same page.

I agree .. the market seems not strong enough to adjust to the rate hike for now. Maybe in a few months it will.

 

[street]

Yes you own the same number of shares, but their value changes. The AA depends on the $ value of each asset class.

If the equity market drops 20%, and you own 50% equities, assuming your fixed income didn’t go up (it usually does) your portfolio is down 10%, and now you are at 44% stocks and 66% fixed income, so you sell some fixed income and buy some equities to get back to 50/50.

If you didn’t do any rebalancing, but waited for equities to go up 25% you would also get back to 50/50. But your rebalanced portfolio would get there a bit faster.

audreyh1 >>> thank you. I get a little overwhelmed with all the people doing their re-balancing. So, your explanation is what I thought, what happens. I'm just going to sit this out again because I feel I might do more harm then good if I start selling and buying. Thanks

 

[JoeWras]

For people whom the market drop changed their aa for equities below target I think now is a good time to rebalance.

(Note. I am not saying your target changed, just that is your target is say 50-50. This 20% drop may have you at say 45/55)

Since we're within 2%, I'm going to take a few deep breaths first before doing anything. I don't have any loss harvesting of significance I can do... yet, so there isn't a rush for this year's taxes.

 

[eroscott]

So, can someone explain to me why when markets go down your % change. Don't you still have so many shares of equity funds and so many bond funds? The price goes down but don't you still have the same number of shares.

So, if no rebalancing is done, and markets start to rise, then you come back up, then the equity % comes back up to where it was at, right?

I have always just bought and held. I hope this is an embarrassing question for me. LOL

Play with a spreadsheet. Here is a few minutes in Google Sheets. Over 1 yr and share price snapshot on 1/1, 7/1/ 12/31.

 

[street]

eroscott >>> Thank you and I have done a little research on just what you have shown me. I understand how it works and I do tracking but I haven't ever re-balanced in almost 40 years of buying and holding.

Through the years of good and bad my AA usually comes back to around that 75%.

 

[Spock]

I agree .. the market seems not strong enough to adjust to the rate hike for now. Maybe in a few months it will.

It's been 10 years. I don't see how the market is going to magically adapt in a few months.

 

[marko]

Remember its all about cashflow. If your cashflow is covering your lifestyle. you don't have to liquidate capital, and you plan to live another 10 years from here you probably shouldn't worry. The only people who lost money in 2008 were those who sold.

Agree.
We live off our dividends and they've been fairly consistent over the past 15 years. This year was unusually generous however; we'll likely buy a bit back in soon.

Having said that, 2008 has made me quite sanguine over our current market.

I was nervous at the time of course, but the following recovery has put me in a very calm mode as we came out of that mess (media: "the end of life as we know it") so nicely and so quickly. For me, 2008 was a great learning experience on why to not panic.

 

[RenoJay]

I'm very surprised, almost shocked, that there is so much of this kind of discussion and sentiment on the ER forum. I thought the vast majority of us were like me: "The market is smarter than I am, so my asset allocation allows me to sleep at night and I tune out the noise and stay the course".

Speaking for myself (as a bear, despite the huge bounce in the past couple days)....I'm not losing any sleep over my current very low allocation to U.S. stocks. And I'm not experiencing anything similar to panic. The big reason I've changed my AA is because I could not find ANY credible experts who are predicting anything better than middling returns for the next decade. Even Vanguard, whom most of us respect, has reports on their site expecting far below historical average returns for the next decade. So now that there's actual yield on cash (and I do hard money lending, too, which yields a lot more), the equity risk premium just isn't doing it for me. Historically there's typically a big drop at some point that brings expected returns more in line with 8% - 10% for the next decade so if that occurs I'll up my AA to stocks again. I wish I could just stay the course forever, but having come of age in the dotcom bubble then the housing bubble, my view is that massive central bank engineering is a force unto itself that has major implications for stocks and that the easing cannot go on forever and continue to lift stocks ad infinitum.

 

[haha]

It seems that most of us here who do indulge in some trading are essentially trading large averages. I have always focused on individual stocks, or at times on industry groups. The downside is that there is more volatility and more chance of very big drops, especially in individual stocks. But more extreme price opportunities present themselves at times.

I also like that I can use insider buying/selling as a signpost. Not certain, but helpful.

Overall, stocks is hard!!!

Ha