The Correction Is Here… Now What?
It’s official, folks. We’ve got ourselves a good, old fashioned market correction.
After losing 1,175 points last Monday, The Dow fell into correction territory on Thursday by crossing a level 10% below its January high.
Talk about a crazy week.
Now, I still stand by what I said last week. Take a deep breath… and remember that corrections are simply functions of normal, healthy markets. There’s no reason to be gravely concerned about the health of the economy or the global market. Earnings are growing. Taxes are falling. Jobs are plentiful. Wages are even rising a bit.
So what’s happening?
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What we are seeing here is simply the reestablishment of a healthy relationship between interest rates, inflation and the market.
From that perspective, it’s actually laudable. I know you may not want to hear that, especially if you’re looking at a black eye or two in your portfolio, but there you have it.
In today’s issue, I want to give a look at what each of our premium experts have been telling their readers this week. That means this issue is going to be a little longer than usual, but I think it’s absolutely worth your time to read what they have to say.
Let’s get to it…
Nathan Slaughter
Ironically, the dramatic selloff on Wall Street was triggered by data that can only be interpreted as positive for Main Street. January’s robust job creation was accompanied by the strongest wage growth since 2009. Why is that a problem? Because it gives the U.S. Federal Reserve more ammunition to raise interest rates, which would be akin to throwing a bucket of cold water on the red-hot rally.
Now, I think it would be premature to sound the full-out alarm. But I do think that the season of rate hikes is upon us, and income investors should be “winterizing” their portfolios accordingly.
#-ad_banner-#There is a near-unanimous consensus that we are headed for at least three, and perhaps four, rate hikes by the end of the year. The next rate hike will be the sixth in the current tightening cycle, which began in December 2015.
And the market is feeling the pressure. While stocks are swooning, bonds have suffered as well, driving yields (and borrowing costs) sharply higher. Average national mortgage rates, for example, just touched the highest level in four years.
While rising rates might have a glancing blow on some sectors, they pose a direct threat to fixed-income instruments as well as many dividend-paying stocks. The most visible impact is in the real estate investment trust (REIT) sector, which is particularly sensitive to rising rates. Even Realty Income (NYSE: O), one of the most stable, reliable businesses on the planet, has slumped to a new 52-week low.
Apartment REITs, lodging REITs, retail REITs, self-storage REITs, healthcare REITs, office REITs… They’re all in the same boat right now. But resist the urge to abandon ship.
These companies might be out of favor currently, but are doing just fine — and dishing out more dividends than ever. Furthermore, history shows that widespread interest rate fears in this sector are largely unfounded. The last time we were in a rate-tightening cycle was between June 2004 and August 2006, when short-term rates marched all the way from 1.00% to 5.25%.
Guess what happened to real estate stocks back then? Well, the iShares US Real Estate ETF (NYSE: IYR) didn’t just stand its ground, but actually rose 54.7% over that stretch.
Editor’s Note: In addition to his comments on the market’s recent drop, Nathan highlighted six current High-Yield Investing holdings that he says deserve “top” consideration for readers in the current environment. If you’d like to learn more about his newsletter and get his latest issue, with names, ticker symbols, and full analysis of these high-yield picks, go here.
Genia Turanova
The first big sell-off of the last couple of years came and went, with the markets handling the bout of volatility relatively well. It’s a good sign, and the markets seem to be on their way to a recovery.
Of course, it’s not the time to be complacent: the recent wave of selling reflected several important fundamental worries, most notably growing concerns about inflation resurgence and the fear of higher interest rates. On the other hand, macroeconomic and fundamental factors still favor stocks at this point.
As the recent shake-up turned out less dramatic than the worst-case scenario, I no longer feel there is a need to create a blanket portfolio protection such as the trailing stop-losses I’ve been recommending before. Therefore, I am hereby cancelling the protective stop-losses that I put into place in the December update issue.
Market sell-offs also create new bargains, and in the future issues of The Daily Paycheck I plan to take advantage of some of these new bargains.
On tap in the February update issue, due out next week: an analysis of the recent market action, its effects on the portfolios, the impact of the protective stop-losses on the portfolio stocks, and a discussion of how and when to reestablish a position after a big sell-off.
Editor’s Note: If you want to grow your retirement portfolio in any market environment, then you need to know about the strategy Genia and her readers use in The Daily Paycheck. By carefully selecting the market’s highest yields, steadiest dividend payers, and rising dividend stars, her readers are compounding their way to an extra $1,543… $2,184… even $4,200 each month whenever they decide to live off these paychecks. This special report tells you everything you need to know…
Jimmy Butts
“What’s going on with my stocks?” This was one of a handful of text messages that I received in the wake of the market turmoil the past couple sessions.
Emotions are running high right now as the market continued the selloff that began last week.
The quick selloff caught many investors and market observers off guard, which isn’t surprising considering how long it’s been since we’ve seen a significant pullback, much less a correction (defined as a pullback of 10%). But keep in mind that corrections are a normal part of the market cycle. What isn’t normal is the strong rally, with little to no volatility, that we witnessed throughout most of 2017.
Of course, anytime we see this much red on the boards it jars people’s faith. Loss aversion kicks in. After all, I didn’t receive those same text messages when stocks were rallying at breakneck speeds.
Regardless, there’s no need to panic. And if you read my February issue [of Top Stock Advisor], then you were prepared for something like this. As I said in that issue, “It’s better to consider — and plan for — potential losses before they happen rather than after fact…”
If the recent market turbulence had you extra scared or nervous, that could be a sign you’re taking on more risk than you can tolerate. If that’s the case, think about taking some profits and cutting some losers. And I would err on the side of cutting losers, as those are the ones that can cause more damage to a portfolio since we typically wait and “hope” they get back to even before we sell. But if a stock isn’t working in a bull market, what makes you think it’ll work in a bear market?
For us here at Top Stock Advisor, the outlook on our equity positions is much longer than a few days, weeks or months. Looking at the bigger picture, this will likely look like a tiny blip on the radar.
And besides, as I calmly replied to the folks texting me about their stocks and the stock market, “It’s about time.”
Editor’s Note: If you’re looking for the kind of portfolio that will help you sleep at night — while still positioning you for serious gains over the long-haul, then I can’t think of any better portfolio to follow than Jimmy and his team over at Top Stock Advisor… Their latest report on the Top Stocks for 2018 is filled with the kinds of picks that survive wars, recessions, financial panics and more while still delivering triple-digit gains to long-term investors. To learn more about this report and get a risk-free trial to Top Stock Advisor, follow this link.