Recovery-Mode: Investing After the Whipsaw

Global stocks have continued their recovery this year. The MSCI All-Country World Index gained 10.8% in the first two months. The V-shaped nature of the latest market move reminds us that investor sentiment often turns on a dime. The sharp selloff last year, and this year’s quick bounce-back, leaves both bulls and bears scratching their heads.

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The Federal Reserve signaled a rate hike pause that relieved investors. The Chinese central bank took more decisive easing steps, cutting bank reserve requirements and injecting liquidity to the banking system. And, for now, investors can take comfort that global policy makers have their back.

As a result of this apparent central bank support, both stocks and bonds have rallied. A pause in rate hikes gives bond investors a greenlight. Stocks received support from both the discounting effect from lower yields and reinforcement that higher interest rates won't squash business activity.

Return of Goldilocks

We could be setting the stage for a “not too hot, not too cold” scenario. Discerning between trade distortions and a real slowdown in economic data is challenging. Regardless, inflation seems contained, and recent volatility shook out some excessive risk-taking. Remaining trade uncertainty is keeping a lid on enthusiasm and could result in a melt-up setting for equities.

Gauging the health of the economy by financial markets is like using an overly sensitive thermometer that vacillates between +200 and -200 degrees. You may get a sense if it is a warm or cool day, but it is still difficult to tell how it actually feels outside. Market sentiment tends to swing from moments of sheer terror to jubilance in a matter of days or months, challenging long-term investors to keep a cool head. Luckily, this matters little for those with a solid plan and a long view.

What We Are Doing

With the rapid rebound, the market presented a short window to pick up stocks at a discount. Still, we look for opportunities to add positions that haven't quite recovered. We have shed shares in some firms where financial strength measures have eroded. We continue to maintain a bias towards companies with high-quality balance sheets and complement our market capitalization-weighted index funds.

What It All Means

It's a challenge to discern what is happening in markets as sentiment swings. Worrying about what is out of your control, and what does not matter in the long run, does no one any good. Having an investment strategy grounded in a sound intellectual framework is a good start. Financial markets have a long history of testing the wits of investors. Experiencing volatility and noting your feelings is the truest indicator of risk tolerance.

Let us know if we can help.

Contact us at 865-584-1850 or

DISCLOSURES: The information provided in this letter is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as investment, legal or tax advice. Proffitt & Goodson, Inc. makes no warranties with regard to the information or results obtained by third parties and its use and disclaim any liability arising out of, or reliance on the information. The information is subject to change and, although based on information that Proffitt & Goodson, Inc. considers reliable, it is not guaranteed as to accuracy or completeness. Source information is obtained from independent financial data suppliers (Interactive Data Corporation, Morningstar, etc.). The Market Categories illustrated in this Financial Market Summary are indexes of specific equity, fixed income or other categories. An index reflects the underlying securities in a particular selection of securities picked due to a particular type of investment. These indexes account for the reinvestment of dividends and other income, but do not account for any transaction, custody, tax, or management fees encountered in real life. To that extent, these index numbers are artificial and cannot be duplicated in real life due to the necessity of paying those transaction, custody, tax, and management fees. Industry and specific sector returns (technology, utilities, etc.) do not account for the reinvestment of dividends or other income. Future events will cause these historical rates of return to be different in the future with the potential for loss as well as profit. Specific indexes may change their definition of particular security types included over time. These indexes reflect investments for a limited period of time and do not reflect performance in different economic or market cycles and are not intended to reflect the actual outcomes of any client of Proffitt & Goodson, Inc. Past performance does not guarantee future results.