The market is finally settling down after the mid-term election cycle. Wednesday was a massive thrust up, Thursday was an extraordinary reversal and today was directionless. Thursday was a surprise to me, and it should not have been.
Here’s why it should have been obvious that the run-up on the news of Democrats taking both congressional reins was over.
Do you see it?
It isn’t that I missed it. I saw it immediately and it is why I took a snapshot of it so that I might have it for a performance update of sorts. Only now I am sharing it as a warning for future times.
Twenty-six of the 28 holdings are in the black. That’s a record. And anytime a measure of performance sets a new record, one should be on guard. I should have known that Thursday would be a reversal, not necessarily on the magnitude of 4%, but certainly a correction that would have produced at least a few more red positions. The size of the sell-off on Thursday was fueled by a -12% meltdown in semiconductor stocks, a meltdown that has been expected for some time. The iShares Semiconductor ETF [SOXX] is still up 31% year-to-date.
There have likely been mathematical entries into academic journals discussing what proportion of portfolios of x number of positions can be expected to have positive returns after y number of years, but the concept should by no means be hard to grasp.
In a portfolio of 28 mature dividend stocks, that has been amassed over several years, one should expect to have a good proportion of them producing positive returns. But 26 of 28 or 93% is very high. There is a reason I hadn’t seen that before and it was gone as soon as the market opened the very next day (yea! 5 red positions).
Don’t get me wrong, the price behavior on Thursday was the result of the mid-term elections, but only indirectly so; the outsized drop was merely a negation of the previous day’s unbridled enthusiasm. It’s like when you’ve been backed up on a highway due to an accident up ahead. Your arrival time has increased by 30 minutes and you’re pissed. Then when you’re finally in the clear, you blast off going 85 mph. It’s instinct. But, after a minute or two, you realize that it isn’t sustainable and you have to come back down to your ‘normal’ level of speeding just enough to not got caught.
This makes sense because while the mid-term election results may one day fuel positive affects for the economy, and I believe they will, any legislative actions are months away, and their effects could take years to materialize.
The economy didn’t change on Monday night and by Friday the market will look as though the mid-term elections never even took place, down for the week like the three weeks before it. This is as it should be. And the extreme exuberance on Tuesday, no matter how welcome, should have been a sign that a reversal was imminent.
The market has chopped for six months now, but we can’t rush it.
Give it time, you’ll feel better.