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  • News
    • 2021 News Articles >
      • REVENGE OF THE NERDS - Internet forums vs. the professionals
      • Protect Your Financial Information
      • 2021 January Market update - A rollercoaster year ends on a high note
    • 2020 News Articles >
      • December Client Letter - Cruising at 30,000 Feet
      • 9 Tax Facts & Tips to Save You Money
      • 9 Smart Planning Moves to Consider
      • November Client Letter - Election 2020
      • 7 Financial Planning Steps for Year End 2020
      • 6 Tips on Filing the FAFSA
      • Circling Back to the SECURE Act!
      • A September Pothole
      • 6 Steps That Put You on the Path to a Successful Retirement
      • Consumer Scams Part 2
      • September 2020 Client Letter
      • Consumer Scams
      • May Client Letter-- Worst-Ever Economy Yet Stocks Show Best Monthly Gain Since '87
      • Why Waiting For A Market Rebound Could Cost You
      • How The Greatest Generation Approached September 11th
      • Laid Off And Near Retirement - What Now?
      • The SECURE Act
      • Market update: When favorable fundamentals collide with uncertainty
    • 2015 News & Articles >
      • To be happy, be grateful. - It's science!!
      • Market Volatility - So Now What?
      • Retirement planning: Start early or start late – just start
      • 2015 Financial Planning Checklist
      • 2014 In Review - A bullish mood and risks that dot the landscape.
      • A sneak peek at 2015 – What to keep an eye on
      • Getting The Most Out of Financial Aid for College
    • News - Archives >
      • 2014 - Cheaper by the Dozen: 12 smart year end planning moves
      • 2014 - How safe is your personal information?
      • 2014 - Hey, what’s your number?
      • 2014 - What did we do before GPS?
      • 2014 - Changing Jobs Checklist
      • 2013 - US Government Shutdown - What it means
      • 2013 - Investing in College
      • 2012 - Getting (back) on track - The best part of my job…
      • 2011 - The Henny Penny School of Investment Wisdom
      • 2011 - 8 Ways to Help Couples Overcome Money Conflicts
      • 2011 - Intelligent Computer Shopping
      • 2011 - 7 things you and your student should discuss before they head off to college
      • 2011 - 7 mistakes to avoid when exiting your business
      • 2011 - Why you need an Estate Plan even if you don’t live in a mansion
      • 2011 - Celebrating Irish Heritage
      • 2010 - Priorities: Retirement Planning Vs College Savings for Children
      • 2010 - in review, and a look toward 2011
      • 2010 - New Years Resolutions - 2011
      • 2010 - Business Owners – a special case for diversification
      • 2010 - Year End Planning 2010
      • 2010 - Paying for college - Applying for student aid, determining your Expected Family Contribution
      • 2010 - Paying Taxes
      • 2010 - Job-Loss
      • 2010 - Habits
      • 2009 - Shopping
      • 2009 - Gift-Idea
      • 2009 - Thanksgiving
      • 2009 - Q3
      • 2009 - Recovery
      • 2009 - Results
      • 2009 - Digging
      • 2009 - Time
      • 2009 - Considering
      • 2008 - Planning
      • 2008 - Resolutions
    • Life Transitions >
      • Get A Job/Leave Job >
        • 9 Questions to ask your CPA at tax time
        • Getting (back) on track - the best part of my job
        • Changing Jobs Checklist
        • Job Loss
        • Taxes - 7 ideas to ease the burden - 2018
        • Year End Planning Checklist: 12 smart planning moves to consider
      • Marriage/Divorce/Re-Married >
        • 8 Ways to Help Couples Overcome Cash Conflicts
      • Kids (Birth/College/Marriage) >
        • 7 Things you and your student should discuss before they head off the college
        • Getting The Most Out of Financial Aid For College
        • Investing In College
        • Budgeting For Students
        • Save on Textbooks
        • Subsidized vs unsubsidized loans – what’s the difference?
        • 7 Tips for Your College Bound Student
        • “What I did on my Summer Vacation – 2019”
        • Budgeting for College Students - 2018
        • Most Significant FAFSA Changes in over 20 Years!!
        • Direct 529 Plan Changes To Be Implemented
      • Birth/Death >
        • Is a cash windfall in your future?
        • Planning for People with Special Needs
    • Client Letters >
      • 2019 - July Client Letter: Records Are Made To Be Broken
      • 2018 - Summer's Hot Issues
      • 2018 - November Market Update:
      • 2016 - January Client Letter - A volatile year ends with a whimper
      • 2016 - September Letter to Clients: The Ides of September?
      • 2016 - November Letter to Clients: The Final Countdown?
      • 2016 - December Letter to Clients: Near Term Impact of Trump's Victory
      • 2015 - September Client-letter: Looking past scary headlines
      • 2015 - November Client Letter: The Clouds Part
      • 2015 - December Client Letter, A Baker's Dozen: 13 Smart Planning Moves

The Henny Penny School of Investment Wisdom

Most of you should remember Henny Penny, from the children’s tale about a chicken that believes the sky is falling and the world is coming to an end when an acorn on its head. The chick decides to tell the King and on its journey meets other animals which join it in the quest; group mentality takes over.  The phrase “The sky is falling!” is prominent in the story, and has become a common idiom indicating a hysterical or mistaken belief that disaster is imminent.   This is not to say that we have not seen a lot of bad news lately as the stock market and global economy continues to struggle, we just need to keep it in perspective.  To see why we aren’t ready to throw in the towel, and to see what happens to Penny’s friends.

It is true we saw a significant correction for virtually all major stock markets in the third quarter. The S&P 500 (SPY) Index lost 13.9% during the third quarter and has lost 17.1% from its 2011 high, which occurred on April 29. It was the worst third quarter performance for the S&P 500 since 1928, according to Bespoke Investment Group. The U.S. stock market has retreated for five consecutive months, with each month’s decline becoming progressively greater.

Trouble at home and abroad:

The Greek debt crisis remains in the news on a daily basis, currently without a solution. The failure of the U.S. Congress to address budget issues, the debacle over increasing the U.S. debt ceiling, and the downgrade of U.S. debt by Standard & Poor's all contributed to U.S. market’s steep decline. The problems in reaching an agreement on the debt ceiling highlighted the ineffectiveness of Congress in dealing with important economic issues and seemed to erode consumer, business, and investor confidence.

The steep market correction also reflects that many investors now believe that the U.S. has either entered another recession, or will shortly enter one.

There is an old Wall Street adage that says that the market has predicted 12 of the last 5 recessions. In a number of instances, the market has declined in anticipation of a recession; however, most of those recessions never materialized. For example, in the summer of 2010, the market suffered a 15.9% decline on fears of a double-dip recession, which never occurred. The economy continued to expand and the market recovered strongly. The stock market also suffered major corrections in 1995, 1998, 2003, and 2005 due to fears of a possible recession, none of which happened.

Unfortunately, the gains from the bottom of last year’s market correction have largely evaporated as recession fears are again unnerving investors.

This pattern of short-term volatility combined with poor long-term returns has lead many investors to believe that market-timing is a viable strategy for generating returns – or at least avoiding losses. However, this strategy is fraught with danger, since predicting the events which cause market movements is virtually impossible.

Much of the selling that occurs during a market correction is based on emotion.

After seeing a decline in market values, some investors become fearful that further losses will occur. This fear, and in some instances panic, will result in selling without any regard to the underlying value of the investments. For long-term investors who focus on the value of companies, there is no reason to sell undervalued positions, and if cash is available, a market correction usually presents an opportunity to buy. For example, renowned investor, Warren Buffett, commented to Bloomberg Television that he had purchased $4 billion of equities during the third quarter as the lower market presented attractive values.

During market corrections, it takes a stronger resolve on the part of long-term investors to stick with an investment strategy. With the decline in market value, long-term performance is eroded and investors lose confidence in equities as a long-term investment vehicle. However, despite the negative news, there are a number of reasons for owning equities:

  • Stocks appear to be undervalued compared with their long-term earnings potential, dividends, and other valuation metrics. For example, the S&P 500 is trading at just 11.0 times forward earnings, significantly below its historical average.
  • Earnings for U.S. companies are at record levels. While the S&P 500 Index trades at approximately the same level that it was 10 years ago, earnings for the index have increased from $38.85 in 2001 to an estimated $98.02 for 2011.
  • Cash on corporate balance sheets is at record levels; balance sheets are in great shape. Treasury Strategies, a consulting firm, reported that corporate cash now stands at $2.05 trillion, 4.5% higher than the previous quarter, and 46% higher than in March 2009.
  • Stocks generate more income than bonds. The dividend yield of the S&P 500 is currently 2.39%. The yield of the Barclays Capital U.S. Aggregate Bond Index is 2.35%. The yield on the 10-year Treasury bond is 1.71%.
  • Expectations for stocks and the economy have declined significantly in recent months. If a recession does not develop, stocks are likely to rally, as they did in the fourth quarter of 2010.
  • Politicians are likely to take actions that will boost stock prices. We are currently in the third year of the presidential cycle. The third year is by far the best performing year of the four-year presidential cycle, probably due to actions intended to stimulate the economy and markets prior to the presidential election in the fourth year. There has not been a negative third year since 1939. Since 1930, the S&P 500 Index has averaged 18.4% in the third year of the presidential cycle.
Economies remain very weak in Europe and the U.S., and another recession is possible. However, much of this economic weakness is the result of market behavior, which should have positive long-term consequences. Consumer demand is soft because individuals are saving rather than borrowing and spending. Banks are no longer lending to unqualified borrowers. Unemployment is high in many areas due to layoffs in the bloated public sector. Long-term funding and spending issues regarding entitlement programs are finally being addressed. The road to a stronger economy and higher stock prices is likely to be unpredictable with many ups and downs. However, there are many constructive factors in place, which should eventually lead to a positive outcome for patient, long-term oriented investors.

Oh, and do you remember what happens to Penny’s friends (the average investors) in at least one version of the story?  A fox invites them to its lair and eats them all.  --I have not been able to verify a version that puts the fox in a business suit on Wall Street, but you can decide for yourself…

John A. Davidson, CFP

john@kyleshill.com

Disclaimer: The author is the Owner of KylesHill Group, LLC, a Registered Investment Advisory firm. Under no circumstances does this article represent a recommendation to buy or sell stocks. This article is intended to provide information and analysis regarding investments and is not a solicitation of any kind. References to historical market data are intended for informational purposes; past performance cannot be considered a guarantee of future performance.

Your comments and questions are always welcome.
We look forward to hearing from you.  mail@kyleshill.com


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The information being provided is strictly as a courtesy.  When you link to any of the web sites provided here you are leaving this web site.  We make no representation as to the completeness or accuracy of information provided at these web sites.  Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site.  When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.  

- John Davidson, CFP
  • Home
  • Background
    • About Us
    • Q&A
    • Disclosures
    • Privacy Policy
  • Services
    • Planning Process
  • Clients
    • Business Owners
    • Individual Professionals, Families, Retirees
  • Contact Us
    • Newsletter Sign-Up
    • Useful Websites & Quick Hits
  • Account Access
  • News
    • 2021 News Articles >
      • REVENGE OF THE NERDS - Internet forums vs. the professionals
      • Protect Your Financial Information
      • 2021 January Market update - A rollercoaster year ends on a high note
    • 2020 News Articles >
      • December Client Letter - Cruising at 30,000 Feet
      • 9 Tax Facts & Tips to Save You Money
      • 9 Smart Planning Moves to Consider
      • November Client Letter - Election 2020
      • 7 Financial Planning Steps for Year End 2020
      • 6 Tips on Filing the FAFSA
      • Circling Back to the SECURE Act!
      • A September Pothole
      • 6 Steps That Put You on the Path to a Successful Retirement
      • Consumer Scams Part 2
      • September 2020 Client Letter
      • Consumer Scams
      • May Client Letter-- Worst-Ever Economy Yet Stocks Show Best Monthly Gain Since '87
      • Why Waiting For A Market Rebound Could Cost You
      • How The Greatest Generation Approached September 11th
      • Laid Off And Near Retirement - What Now?
      • The SECURE Act
      • Market update: When favorable fundamentals collide with uncertainty
    • 2015 News & Articles >
      • To be happy, be grateful. - It's science!!
      • Market Volatility - So Now What?
      • Retirement planning: Start early or start late – just start
      • 2015 Financial Planning Checklist
      • 2014 In Review - A bullish mood and risks that dot the landscape.
      • A sneak peek at 2015 – What to keep an eye on
      • Getting The Most Out of Financial Aid for College
    • News - Archives >
      • 2014 - Cheaper by the Dozen: 12 smart year end planning moves
      • 2014 - How safe is your personal information?
      • 2014 - Hey, what’s your number?
      • 2014 - What did we do before GPS?
      • 2014 - Changing Jobs Checklist
      • 2013 - US Government Shutdown - What it means
      • 2013 - Investing in College
      • 2012 - Getting (back) on track - The best part of my job…
      • 2011 - The Henny Penny School of Investment Wisdom
      • 2011 - 8 Ways to Help Couples Overcome Money Conflicts
      • 2011 - Intelligent Computer Shopping
      • 2011 - 7 things you and your student should discuss before they head off to college
      • 2011 - 7 mistakes to avoid when exiting your business
      • 2011 - Why you need an Estate Plan even if you don’t live in a mansion
      • 2011 - Celebrating Irish Heritage
      • 2010 - Priorities: Retirement Planning Vs College Savings for Children
      • 2010 - in review, and a look toward 2011
      • 2010 - New Years Resolutions - 2011
      • 2010 - Business Owners – a special case for diversification
      • 2010 - Year End Planning 2010
      • 2010 - Paying for college - Applying for student aid, determining your Expected Family Contribution
      • 2010 - Paying Taxes
      • 2010 - Job-Loss
      • 2010 - Habits
      • 2009 - Shopping
      • 2009 - Gift-Idea
      • 2009 - Thanksgiving
      • 2009 - Q3
      • 2009 - Recovery
      • 2009 - Results
      • 2009 - Digging
      • 2009 - Time
      • 2009 - Considering
      • 2008 - Planning
      • 2008 - Resolutions
    • Life Transitions >
      • Get A Job/Leave Job >
        • 9 Questions to ask your CPA at tax time
        • Getting (back) on track - the best part of my job
        • Changing Jobs Checklist
        • Job Loss
        • Taxes - 7 ideas to ease the burden - 2018
        • Year End Planning Checklist: 12 smart planning moves to consider
      • Marriage/Divorce/Re-Married >
        • 8 Ways to Help Couples Overcome Cash Conflicts
      • Kids (Birth/College/Marriage) >
        • 7 Things you and your student should discuss before they head off the college
        • Getting The Most Out of Financial Aid For College
        • Investing In College
        • Budgeting For Students
        • Save on Textbooks
        • Subsidized vs unsubsidized loans – what’s the difference?
        • 7 Tips for Your College Bound Student
        • “What I did on my Summer Vacation – 2019”
        • Budgeting for College Students - 2018
        • Most Significant FAFSA Changes in over 20 Years!!
        • Direct 529 Plan Changes To Be Implemented
      • Birth/Death >
        • Is a cash windfall in your future?
        • Planning for People with Special Needs
    • Client Letters >
      • 2019 - July Client Letter: Records Are Made To Be Broken
      • 2018 - Summer's Hot Issues
      • 2018 - November Market Update:
      • 2016 - January Client Letter - A volatile year ends with a whimper
      • 2016 - September Letter to Clients: The Ides of September?
      • 2016 - November Letter to Clients: The Final Countdown?
      • 2016 - December Letter to Clients: Near Term Impact of Trump's Victory
      • 2015 - September Client-letter: Looking past scary headlines
      • 2015 - November Client Letter: The Clouds Part
      • 2015 - December Client Letter, A Baker's Dozen: 13 Smart Planning Moves