As the Federal Reserve (“Fed”) ends QE this month, volatility is back and risk is finally being re-priced.  The Fed gave all of us a sense of complacency with the implementation of its QE program and now that complacency has evaporated.   We believe volatility is higher than normal because it was suppressed by the Fed.  Volatility is like a pressure cooker, if suppressed, it builds up and ends up being greater than it should be when it is released.

We have been mentioning for the past few quarters that risk in the stock market was high (that is why we were underweight equities, overweight alternatives and virtually eliminated our high-yield bond positions) in our portfolios.  We also reduced positions in our more aggressive funds – especially at the end of last year.  With the Russell 2000 Index now down greater than 10% this year, managing risk has been beneficial.  People are just starting to realize that risk is back and we expect to see additional selling pressure over the next several weeks as investors reduce equity holdings.

Remember that volatility is not always bad.  This is a time when we start looking for opportunities in the equity market.  It always amazes us that if Macy’s advertises a sale of 20%-30% off, people are lining up to buy before the store opens.  With the stock market, it is the complete opposite mentality.  If the market sells off 20%-30%, the only thing you hear is crickets, not investors.  When the market runs up, however, people feel everything is alright and buy in at higher prices than they should.  That is why the average investor has significantly underperformed the market over the last 20 years (see chart below).

What this means for your portfolio

This is our busiest time at THOR.  Why?  This is when we believe the greatest opportunities to invest occur.  The key to investing is to buy low and sell high.  Because we are underweight equities, we have capital to invest in our portfolios.  Our alternative positions in our portfolios are also performing quite well in this downturn.  They are producing positive returns.  There will be a time to become more aggressive.  You can make money in any economic environment; it all depends on what you buy and what price you pay.  We are starting to get excited about the bargains we are beginning to see.  For example, last month we talked about the opportunity in emerging markets.  Our investment committee approved an investment in emerging markets at the beginning of September.   However, the purchase wasn’t made for almost a month because of the short-term selling we saw in the market.  We just invested in that position at almost a 10% discount by waiting.  We get excited about investing in a fund that has stocks selling at half the price of US stocks, produces a higher dividend yield than the US stock market, has higher growth rates and has less corporate and government debt.   We will be very active looking for other investment opportunities like this over the next few weeks/months.

Interesting fact – it takes the average college student 13.4 years to pay off their student loans.

Sincerely,

Your THOR Team

THOR Investment Management, Inc. is a registered Investment Adviser with its principal place of business in the State of Ohio.  The commentary contained in this market update is limited to the dissemination of general information pertaining to THOR’s wealth management services.