Weekly Market Commentary 8-15-2011

"After a wild week on Wall Street the world is different"

Tim Phillips, CEO – Phillips & Company

This was the cover of Time Magazine just after the crash of 1987. I remember being very new in the business and thinking, "Had the world fallen apart?" At the time, I also thought a “crash" was a once in a lifetime event. It looks like I was wrong on both accounts.

INDU INDEX over time


People think things are different because today we have High Frequency Traders, algorithms and hedge funds, but I would argue similar schemes and large investors existed in 1987 as well. Despite our 2011 “wild week on wall street,” the S&P 500 closed down only 1.64%.


move of 4 percent or more over four consecutive days


In my opinion this wild week was due to the increased probability of another recession and uncertainty in the European Banking System (note uncertainty not failure). At the same time, retail sales data came out that seems to suggest the consumer is not in too bad of shape (as we suspected). Sales continued to grow for the 4th month in a row including increased sales for electronics and appliances.


We believe if another recession happened it wouldn’t be a repeat of the Great Recession of 2008. Cyclical industries like automotive and homebuilders are not coming off revenue bubbles and are still bouncing along the bottom.


US light vehicle sales SAAR

housing starts, total and one unit structures


We also know that investor confidence and consumer confidence can be a threat to push the consumer back into a cave. This is one we’ll need to watch closely.


University of Michigan Consumer Sentiment


I see two possible scenarios:


  • If the consumer does not nose dive then this market reaction is overdone and opportunities lie ahead
  • If the consumer does nose dive then the market was right and market prices have already taken that into account.


In other words, possible good upside opportunity with limited downside


The interesting thing about allocating cash into your portfolio at this time is the potential outstanding return opportunities:


average of all five year annual total returns after 16 major s&p 500 declines

The downside to reacting to emotions is the poor returns you can achieve when you try to time the market too much (I am a firm believer in opportunistic cash at the risk of being wrong many times):


investor vs market returns and the perils of market timing


Besides the yield on the S&P 500 is currently better than that of treasuries:


10 year treasury yields vs s&p 500 earnings yield


After weeks like this it’s a good time to review your investment time horizon relative to your needs. For individuals, this means thinking about your retirement time frame and determining how much time and ability you have to ride out “wild weeks.” For foundations and endowments this means focusing on the big picture; thinking multi-generational and not in terms of “wild weeks.”


Over the last 25+ years I’ve been in the industry, the world has definitely changed. However, over the last 2000 years, our emotions have not. Humans have always been “fight or flight” animals and unfortunately it’s not a good quantitative analysis tool.


If you have questions or comments please let us know, and we always appreciate all your feedback


Tim Phillips, CEO – Phillips & Company


Research Provided:
Scott Edwards, Vice President of Wealth Strategies – Phillips & Company

Adam Gulledge, Associate – Phillips & Company


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