The alarm bells were sounded yet again yesterday as markets "plummeted" (quotes meant to note sarcasm) with the S&P down 3.2%. That's the 20th time in the last 39 trading days that the index has closed the day up or down at least 1% (my definition of a volatile day), and there is more of that ahead. Last week's post Black Friday mini-euphoria was replaced yesterday by fear as the two-five year part of the yield curve inverted, prompting calls of an economic slowdown, and even the dreaded "R" word.
As a value investor, I am wired to be skeptical...of everything market related. Frankly, I am more worried about bigger issues such as getting the national debt under control then I am about yesterday's market action, mini-yield curve inversion being the harbinger of doom, and predicting an imminent recession. I even take offense at how the term "markets plummeted" is thrown around these days. A "799 drop" in the Dow sounds rather ominous for sure, but way worse to the average investor than a "3%" drop in the Dow.
It reminds me of the financial advisor who was trying to assess risk with a new client, asking them how they would feel if their $1 million portfolio lost $200,000? The client replied that such a loss would be devastating and they could not stomach it. The advisor then asked how the client instead would feel about a 20% loss in the portfolio, to which the client replied that such a loss would be palatable.
One thing we did see yesterday, however, was that smaller, more distressed names really got nailed, with the Russell 2000 Index down 4.4%, and Russell Microcap Index down 4.3%. That is what I am keeping an eye on, whether there is a growing performance divergence on the down days between large and small caps. Many times this year when markets have had a rough day, smaller names have held up better than I'd have expected. But real fear will drive investors to jettison the smaller names first, the lower the quality, the greater the damage.
Yesterday we saw a "Who's Who" of challenged names such as Fitbit (FIT) (-6%), Dean Foods (DF) (-5.5%), General Electric (GE) (-6.8%), Kronos (KRO) (-6.3%), NL Industries (NL) (-6.3%), and Tutor Perini (TPC) (-6%), to name a handful giving back more than the markets overall, and it's hard to say if there's more to come.
This fear and volatility, if it continues, will make tax-loss selling season even more interesting, and might even shake out a bargain or two. That's what you want to watch for when markets overly punish names.