With no fewer than three potential big, bad events (and a fourth – the FOMC meeting – on tap for next week), traders appear to be in wait-and-see mode at the present time. And since I do not believe in making predictions about what the news will be – or more importantly how Ms. Market is going to react to said news – I would like to spend our time this morning talking about the subject of managing risk in the stock market.

Long-time readers of my oftentimes meandering morning market missive know that I am a risk manager. I always have been. I always will be. My career was shaped in the early 1980’s by the likes the late Marty Zweig, Ned Davis, and Stan Weinstein. They taught me early on that one of the best ways to make money in the long run was to avoid losing a lot of money in the short-run. And while my approach has shifted over the years (I’m much more big-picture/long-term oriented these days) my overriding objective of investing hasn’t changed. In short, I strive to stay in tune with what the market is doing and to lose the least amount possible when the bears are in control on Wall Street.

To be sure, this hasn’t always been a popular approach. In the late 1990’s for example, the idea of managing risk was almost laughable as the secular bull was raging, 10-year returns in the high-teens were normal, and the mutual fund industry had convinced investors that the key to success was to simply buy and hold. “Time, not timing” was the battle cry and back then, investors and advisors alike were taught to be “long-term” in their approach.

However, what I’ve learned over my career is that advisors and clients alike tend to be long-term – as long as they are making money!

The bottom line is that after two of the most brutal bear markets in history occurred within a nine-year period, a great many investors have decided to rethink their approach. Gone is the notion that investors should just put their money in a mutual fund and leave it there – forever. Gone is the idea that managing risk is a fool’s game. And gone is the concept of just riding things out when the bears come to call at the corner of Broad and Wall.

“My 401K is Now a 201K”

No, investors distinctly remember the pain of their “401K’s turning into 201K’s” during the 2000-2008 period and they don’t want that to EVER happen again. Never mind the fact that the next bear market usually looks nothing like the last one. Today, investors want assurance that the destruction they witnessed in their accounts during the 2000-2002 and 2008 through March 2009 bear markets won’t happen again.

While I may be guilty of “talking my book” here, the idea of trying to “do something” (anything!) to prevent the vicious declines that can accompany bear markets sounds pretty darned appealing to most of the folks I talk to.

Ask yourself this question: If you have a choice, do you want to remain fully exposed to stock market risk during the next bear market decline?

For those that answered, “Sure, I’m long-term – I don’t look at my retirement accounts anyway,” feel free to stop reading now – and you can skip some of next week’s missives as well.

But for the rest of you, now might be an excellent time to think about your strategy for the next bear market.

To be clear, I’m not suggesting that a bear market is imminent. However, given that (a) the current economic recovery is now nine years old (and one of the weakest in the post-war era), (b) stock market valuations are very high from an historical perspective, and (c) this is now the second longest period in stock market history without a 20% correction, now might be a great time to put a plan to “lose less” during the next bear market.

Even BlackRock Agrees!

And much to my surprise, one of the biggest money managers on the planet – a little company called BlackRock – agrees with me.

Yep, that’s right. Unlike the 1990’s, when Wall Street told you to hang in there and not to even THINK about adjusting your portfolio during bearish environments, today BlackRock is encouraging investors to understand risk and to actually do something about it.

So… Next time (likely on Tuesday), we will review the presentation BlackRock made at our advisor conference – a presentation that encourages investors to “win more by losing less.” What a concept!

Thought For The Day:

Do what you feel in your heart to be right – for you’ll be criticized anyway. -Eleanor Roosevelt

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

    1. The State of the U.S. Economy

    2. The State of Earning Growth

    3. The State of Trump Administration Policies