April Update!

“Man intends one thing, Fate Another” – Pub Lilius Syrus, Sententia. No. 253 (c. 43 B.C.)

John Lennon famously paraphrased the above quote in a more modern context in his song “Beautiful Boy” when he said,

“Life is what happens to you while you’re busy making other plans”.

It is a kind of tradition for me to take some time off after-tax season to try and recharge my batteries. No, I don’t really take “time off” as there is always work to do, but I try to spend less time on the computer and more time outside getting fresh air.

This year, the weather (yeah, I have a bone to pick with Punxsutawney Phil[i]) and the Mr. Market decided to spoil my plans.

Since April 1st, the average temperature in Reston, VA has been 57.63°[ii] (early spring?) and the S&P Index is down 4.45%[iii] which includes the bounce on April 22^nd (which was the first up day since April 11^th).

Of course, there are many more reasons that investors decided to sell than we can list here. Here are a few:

• The potential for a “full-blown” war in the Middle East[iv]
• The hotter than expected inflation data[v]
• Investors reevaluating the probability of rate cuts[vi]

Are any of these “the” reason? Who knows?

Sure, any one of those reasons could be good cover, but in the end, what happened over the first three weeks of April was that investors and traders were more motivated to sell stocks than to buy them, which drove prices lower.[vii]

Note, I didn’t say that there were more sellers than buyers. Sure, it is possible that there are physically more sellers than buyers, but in practical terms for every share that is sold, it must be bought – which means - to me, at least - there is and will always be an equal number of buyers and sellers if the nominal price is above zero.

Let’s take a bit of a step back an remember how a market works.

If you want to sell, you go to market and look for someone to trade with[viii]. You take your product to market (in this case a stock), and you look for a buyer.

You will make a trade when you as the seller and the buyer agree on a price. The more motivated investor will drive the direction of that price.

If investors are not really interested in buying, you must lower your price to “entice” them to trade.

The same thing happens in reverse if buyers are motivated, they will bid the price of your stock up hoping to entice you to sell to them.

If the market is trending higher, investors might be willing to part with some of their shares as prices move higher – the way we do when we rebalance. If a stock (or asset class) rises above a range that we’ve set, we will sell off part of it to bring it back into range.

So, what causes the market to switch from trending higher to trending lower? Again, it is simply a larger number of motivated sellers. If you get enough of these sellers, the number of shares for sale can rise above those that are desired.

What are some of the possible reasons? Well, there are as many reasons as there are investors, but here are a few examples:

• You have a child going off to college in the fall, and you want to make sure that you have the college funds liquid and available for the coming expense.
• You get a layoff notice from your employer, and you realize that you need to have some cash to fund your lifestyle while you search for another job.
• You’ve had a stock that has risen more in value than you expected, and you believe that the expected return for the future isn’t attractive, so you take your profits.
• You’re a portfolio manager, and you get told by your risk model that you need to reduce your exposure to stocks.

If this goes on for consecutive days or weeks, stress can rise for some investors, and then those investors may begin to allow the little man in their head to tell them “Things could get much worse” which makes them panic and feel a need to sell at any price to “protect themselves”.

Think about each of the reasons I mentioned above? Do any/all of them apply to you? If not, then why would you react to the fact that others are being “forced” to sell?

This is the reason that we recommend you keep enough cash to cover you for short-term needs. This allows you to ignore the crowd and remain focused on your long-term goals.

If you would like to discuss your financial situation, please reach out.