Carnegie Investment Counsel Blog

Knee-jerk Market Reactions Rarely Prove Beneficial

Posted by Richard Alt on Oct 28, 2014 4:57:00 PM


The numbers since the end of the quarter are not pretty: The S&P 500 Index as of this post is down 5.5%, and more surprisingly the yield on the 10 year Treasury is down to 2.01%!  This pullback FEELS especially hard after the tepid nature of the market over the last nine quarters.

The message of the Carnegie Counselor this quarter was written to address this particular issue. When share prices slide, do not panic, these things happen. What you don’t do during what we think will be a temporary dip in prices is more important than what you do.  Don’t go to cash. Don’t change plans. Don’t forget the long term fundamentals.

How Big Is The Impact?

A 5.5% pullback doesn’t even erase the gains on the year for the market. All the key elements we discussed at our quarterly review meeting remain intact. Inflation is low due to falling commodity prices, interest rates remain low, unemployment is below 6%, wage prices are in check, price of oil is falling, housing is recovering and earnings are still growing.  As suggested on Monday, October 13, 2014, this is a good time to lay low through the election and let things cool down. Being heavy in cash is a good thing, and we have lots of cash in accounts. Don’t jump back in with two feet because we may still have volatile days ahead. The downward pressure that has been building for some time might not be entirely done.

During Difficult Market Conditions, Relax!

Indeed, there is no reason to sell: Good companies that we wanted to buy on August 30 of this year are simply at better prices today. With oil dropping from $100/barrel to the low $80s, this will directly hurt energy names. While the pipelines should be fine, integrated oils are particularly vulnerable to this drop in oil prices for their earnings. Overall, staying the course is the right approach currently. Knee-jerk market reactions rarely prove beneficial.

by Richard Alt

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Richard Alt

Written by Richard Alt

Richard Alt is Principal and Chief Investment Officer where he oversees the investment process of the firm. In this position, Richard works with select clients to understand their financial objectives, then customizes and manages an investment portfolio to help them reach their goals.

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