What Should We Be Watching?



BY JON MARZANO, AIF®, MANAGING PRINCIPAL

At Marzano Capital Group, Monday mornings are a time for our team of advisors to sit down and discuss the economy and our allocations in client portfolios. With the speed of news dissemination, the thirst by the media for a juicy headline, and the multitude of dramatic events going on around the country, it is important to keep our eyes on what matters most for our clients. In our opinion, what matters most is a rational long-term view – period! To best serve our clients, having frequent and frank discussions about our biases and investment ideas helps keep our team aligned and helps us to make investment decisions.

The first half of this year has been the most interesting six months that I have been through. The volatility we experienced in such a short timeframe has been like no other in recent decades. Any investor in their mid-40s or younger did not have money in the markets on Black Monday in 1987, which is what I would say would most closely resembles this year’s market volatility. By now, that age group does have money invested and it hurts to go through large drops. Volatility shows us that we can be vulnerable and there are risks out there, some of which we cannot see. Hopefully, bad decisions were not made to sell out of investments when they were down in February and March. We have seen a quick 40% surge back in stock prices since then. The “indexes” are all back within “a range” of where they were in late January when the markets were hitting fresh highs.

Now to the point – one question I ask a lot of clients when I am coaching them through a volatile time is, what index are you watching? Most of the time, I get a response of “the DOW.” I have a simple thought as we move forward that I want to make sure each of you understand. If you are gauging how the market is doing by looking at the same short list index that investors did back in 1987, you may not be seeing the bigger picture. The DOW Jones industrial average is made up of 30 stocks. Those 30 stocks are all big companies, many of them well run but not nearly as diverse as the stocks represented in the S&P 500. The S&P tracks a larger group of stocks that I believe are more representative of the diversification that a person would have in their portfolios. If you have not Googled the list of stocks in each of those two indexes, please do that.

Back to the point – how the DOW and the S&P continue to recover from here may be surprising. They may not move in lockstep with each other. Which index has a larger list of companies that are “becoming” more relevant, not “were” relevant?


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