In The Path of Hurricane Michael, Here’s This Investment Advisor's Insights

As an Investment Advisor, located in Bloomington/Normal IL, the biggest danger I face on a daily basis is a paper cut.  So, I felt safe when the news alert flashed this ominous warning, “Leave town!  You can always come back, but you’ll be alive.”  It was hurricane Florence and I felt comfortable his sage advice didn’t apply to me.  Little did I know then, I WOULD in fact be in the direct path of a hurricane of epic proportions, just weeks later!

When Hurricane Michael made landfall on Florida’s Panhandle on October 10th 2018, it was the third-most intense Atlantic hurricane to hit the U.S. in all of recorded history.  Of course, I didn’t foresee this on the first morning of our family vacation in Panama City Beach, FL on October 7th!   But around noon that day, the first warning signs began appearing.  The weather channel reported a possible Category 1 hurricane headed straight for us.  My husband said it would probably be just a storm with some wind and rain; nothing to get worried about.  Over the next twenty-four hours, we followed the news as the magnitude and danger grew.  It became obvious a historical Category 4 or greater hurricane would directly hit us, if we stayed.

Two days before the hurricane, we rushed to beat the mass evacuation out of the city, as the ocean grew more violent out our windows.

We witnessed the hurricane’s destruction on the news, grateful we had sought safety at the ‘happiest place on earth’.  While watching reports of the widespread damage, I saw other news regarding the financial markets, with the Dow Jones plunging 1,377 points over the two day period!  A 5% drop by itself isn’t a cause for panic, but I did wonder if that was a warning sign of a different kind of storm that investors may soon be facing.

With a hurricane, you have plenty of warning to get out safely.  But when the market drops, it often comes like a tornado with little or no time to avoid the path of danger.  The best course of action is to plan in advance how to shelter from such storms.  The same goes for investments.  When I prepare investment plans, that’s the exact reason I rely so heavily on various risk analysis methods.  There should be no surprises in losses from improperly allocated investments.

But, for those prone to speculation, or trying to ‘time the market’, a 5% drop could be seen as an imminent more significant market drop, or even a recession.  Here are some key FACTS to consider:

  • Through Sept 28th, 2018, the longest bull market has been going for 9.6 years with an annualized S&P 500 return of 17.9%! [1]
  • As of October 18th, 2018, the Shiller PE Ratio sits at 31.34. This is the ratio of price to earnings for S&P 500 companies and it is used to gauge whether a stock is undervalued or overvalued against historical earning records.  This is only the third time in the past 148 years it has sat above 30!  Historically, it’s averaged around 16. [2]
  • When you take those two facts, and add in the fact that as of October 18th, 2018, the 10 Year Treasury rate is 3.16% (the long-term average is 6.20%)3, you see an alarming gap. Many believe this anomaly of low-interest rates and high valuations are an area of concern that could eventually trigger a sudden bear market![3]

Are the warning signs there?  Could we be facing a stock market plunge like in 2008?

Look, I don’t know the future any better than the other so-called ‘experts’.  What we all know is the stock market goes up and it goes down in cycles.  Just like storms come and go.  My advice is to be prepared before the storms come, no matter when they come or how bad they might end up being.  The best course of action is to have a tested plan that’s built to weather whatever storm may come.

So, how do you prepare in advance against market-based threats to your investment portfolio? If you’re concerned about this, it may be a sign you are either facing more risk than you are comfortable with, or you may not know exactly how much risk exposure you currently have!  A tech-savvy investment advisor can utilize advanced computer algorithms to calculate the risk with current holdings and compare against an individual’s comfort level.  This may lead to a more appropriate allocation of investments that may better weather market downturns.  Other times, with a longer investment time horizon, the analysis may reveal pursuing higher long-term gains might make more sense.  It comes down to building a financial foundation that is computer stress tested against various scenarios to predict desired outcomes with a greater than 90% accuracy.

I learned the importance of preparation and a philosophy of preparing a foundation that’s built to stand up to extreme weather challenges. After the storm had passed we heard the news of the devastation and huge swaths of structures reduced to rubble.  Yet, we found out our beach condo we had left was still standing strong.  It was definitely built to weather the storm and just as the builders had prepared for the worst, we were smart enough to heed the warning signs and get out.  And just like the official warned to get out and come back alive, we can’t wait to return to the beautiful beaches of Panama City Beach and enjoy sunnier days!

 

[1] Source: First Trust Advisors L.P., Morningstar. Returns from 1926 – 9/28/18. These results are based on monthly returns–returns using different periods would produce different results.The S&P 500 Index is an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance. Investors cannot invest directly in an index. Index returns do not reflect any fees, expenses,or sales charges. https://www.ftportfolios.com/Common/ContentFileLoader.aspx?ContentGUID=4ecfa978-d0bb-4924-92c8-628ff9bfe12d
[2] Source:  http://www.multpl.com/shiller-pe/
[3] Source:  https://ycharts.com/indicators/10_year_treasury_rate