My apologies to those of you who don't watch football, and thus the following analogy is lost on you. My apologies also go out to those that have New England Patriots blood coursing through their veins. (a very close family member of mine being one of them)
The New England Patriots are an NFL team who have exercised a period of dominance over opponents for the past decade or so, leading them to 5 Championships. Such success created unrelenting confidence (sometimes obnoxious) which was quickly derailed after they fell to the underdog Philadelphia Eagles in Sunday's Superbowl game. Post game.....Brady's too old, Gronk is retiring, Coach Bill got outcoached.....THEY ARE TOAST! How does this metaphor compare to the recent market volatility and weakness.
The Patriots are still an outstanding team, however their run of total dominance is getting a bit long in the tooth. Past performance will be difficult to repeat, but that does not mean the many of the core fundamentals that made them great are still not present. Can they make one more run? Probably.....I wouldn't be the one to bet against it, that's for sure.....at least not quite yet.
The equity markets are the same. Investors have been winning for so long (and without much fear of loss), that a complacency has crept in. There has not been a material down-day in some time, and any move down was quickly erased by a march back up, and then some. Yesterday (Monday Feb 5 2018) saw a material drop in worldwide averages to the tune of approximately 3-5%. Everyone is writing the collective investment eulogy forgetting that global growth is still strong. Corporate earnings have beaten the street 80% of the time during this reporting period. Easy monetary policy still dominates Japan and Europe. Tax reform in the US still has to flow through....... Bond yields have jumped, but the fundamentals are still the same. The bull market might be long in the tooth, but I wouldn't be the one to bet against it....at least not quite yet.
Stick to your guns
I called clients back on December 15th of 2017 to take profits and put some cash on the sidelines. Come the middle of January, I admittedly felt a little silly as the march upward continued. "Was I too early?" I had to remind myself that this question is somewhat irrelevant for long term investment success. The plan dictated that a rebalancing was needed. Equities had run too long and we were way overweight.....respect the plan and the asset mix it calls for.
Sometimes this can be difficult but hopefully this insight has helped. I have also attached the following publications from RBC, Manulife and Russell that should help illustrate. Call me and let's talk about it.