October 401k Outlook and Update

Volatility rules the month of September and October is setting up for more of the same. As we review the last month and look forward I find it important to emphasize the fact that retirement accounts are long term investment vehicles that should be manage with that priority in mind. If you are three years or less from retirement and starting¬†distributions from your account it is equally important to adjust your portfolio accordingly and plan for the exciting event. Planning is an ongoing process and not just a one time thing we can do and forget it. The markets change, our objectives change and unfortunately the rules often change relative to taxes and benefits. Take the time to first determine what you want relative to your retirement income and lifestyle, then design a strategy to achieve your objectives. Monitor your progress on a regular basis and make the adjustments as necessary. With that in mind… let’s look at what is happening in the markets.

The S&P 500 index fell 1.8% for the month of September and it could have been worse. What changed? In a word, reality! I am not one to speculate or prognosticate what is going on with the markets or why, but I do like to look at what is disturbing investors currently and determine if it has any validity and more importantly is the worry sustainable. If you read much of what I write about the markets short term in my daily notes you know that impacts on the market come in the form of events, Russia’s advances relative to the Ukraine is a good example. News,¬†Hong Kong’s recent protests in the streets over government controls. Fundamentals, earnings and economic data are two primary fundamental impacts on markets. It is important to determine how each will impact markets and what time frame will they impact markets and prices. News and events have short term impacts on the market while fundamental have longer term impacts on markets and prices. Thus, my job is to filter the news, events and fundamentals and make adjustments as necessary.

The impact to the broad markets in September came from a combination of all three. The most important of which has been the fundamental for our purposes in managing our 401k. The data has not shown the improvements that I and many others had hoped would show up by this point in the economic recovery. Jobs have been added, but at the lower income range. GDP has improved, but is projected to be in the 2-2.5% range and that is not enough to sustain market growth as the levels some are projecting. Earnings have been positive, but they are beating lower revisions. Revenue for companies have not grown proportionate to prices, with stock buybacks and spending cuts keep earning positive. All of this adds up to slow growth and that will not allow stock prices to rise at the rate we have experienced over the last 24 months. Thus, we are prepared for the growth of the broad markets to slow going forward. If the data slows any more than the current adjustments it could result in a correction or pullback in the market prices. Thus, we have to evaluate and determine if and/or when our allocation should change from the current exposure to stocks. We are not there as of this post, but we have to look at what level we would adjust and or raise cash as a part of our allocation.

The chart below is the S&P 500 index since January of this year. Despite the ups and downs the index has advanced 6.7% for the year. Based on the long term trendlines of the index we are currently using 1910 as the level we would want to hold in order to remain fully invested. Being that September ends the third quarter of the year we will have earnings reports and economic reports relative to the quarter. If it holds up all will go well moving forward. If the data turns lower, we have to watch how we will manage this event. You will receive a specific email addressing how to allocate both the current money and future allocations. Managing risk relative to long term time horizons is always a challenge as the science of projecting the impact of the fundamental data is intertwined with the short term news and events impacting markets. Thus, we will ladder out of our positions and make the market validate our beliefs looking forward. We will take a the approach of making an error on the conservative side versus holding too long and giving up our profits we have been so patient to accumulate.


A quick look at the returns for the major market indexes in September:

  • Dow Jones Industrial Average – down 0.1% (September) & ¬†up 2.8% (YTD)
  • S&P 500 Index – down 1.8% (September) ¬†& ¬†up 6.7% (YTD)
  • NASDAQ Index – down 1.9% (September) ¬†& ¬†up 7.6%¬†(YTD)
  • Russell 2000 Index (small cap) down 6.2% (September) ¬†& down 5.3% (YTD)
The S&P 500 index closed the month back below the 2000 level and in position to test the key support of the 1978 mark. The challenges have been multiple for the index and the broad markets overall. Weakness in the leaders and growth sectors is weighing the index down. Technology has seen the bulk of the selling along with energy which has been challenged by the drop in energy commodity prices. The trend in energy is not likely to change any time soon as the demand side of the equation both in the US and globally has been flat to declining based on sluggish economic growth. Unless that changes near term the outlook for the sector will remains questionable. 

The global picture has seen the greatest impact on the downside as Europe struggles. The credit for the struggle is given to the Russian sanctions over the Ukraine. If and when those sanctions are removed the hope if for the picture to improve in Eurozone. The emerging markets are equally challenged as the dollar strength has impacted these countries. A stronger dollar weakens oil prices, and commodities overall which is the greatest portion of GDP in the emerging markets. Long term these countries will do better, but they are selling off currently. They are worth watching for future opportunities, but not worth the risk of holding currently.

Economic data remains the one key ingredient we are watching going forward. The improvements in second quarter relative to earnings and GDP may not be sustained as we report the data for third quarter. The next few weeks will shed new light on the outlook going forward. A growth outlook of 2-2.5% for the fourth quarter is not enough to move the needle on US growth relative to stock prices and that is the concern we will watch and allow the markets to validate or ignore the data and continue higher.

October is historically the worst month relative to volatility in the broad markets.¬†The S&P 500 index has experienced its worst performance in this month historically. That doesn’t mean it will happen this month it just tells us to be aware of what could happen. All the talk about a correction in the index or the excessive valuations are just that talk. Let the trendlines determine the direction along with investors as they will determine both the short term and long term results.¬†If the price breaks through the long term trendlines we will worry and take a stance relative to reallocation as stated above. The chart below of the S&P 500 index shows the weekly chart going back to the low in March 2009 and you can see the uptrend line is still well in play.. This is why we still own the S&P 500 index in our allocation and until there is reason to change we will go with the trend.


The key is to not confuse short term activity in the markets with the longer term time horizons. We will continue to measure risk relative to potential rewards, but the charts will always be the deciding factor on how we determine to exit or stay fully invested.¬†One¬†primary question still buzzing around the headlines is when and how much does the market correct or pullback?¬†Again that is a speculation based question and it only conjurers up emotions when asked or framed by what is taking place in the broad indexes currently or looking forward.¬†Stimulus is scheduled to end in October as the Federal Reserves cuts quantitative easing and bond purchases. That could lead to a rise in interest rates, but we will have to see how it unfolds. Higher interest rates are seen or believed to be a drain on the economic picture going forward. This speculation has been around for awhile and year-to-date the thirty-year treasury bond has risen more than 17% while yields have declined near 80 basis points. Thus, if what you thought to be true, wasn’t… when would you want to know about it? Interest rates will rise eventually, but until they do stay focused on what you know to be true.

Be patient and most of all be disciplined.

The following is our current allocation for 401k portfolios:

  • 100% of assets allocated to the S&P 500 index funds. For our allocation we are using the Fidelity S&P 500 Index Fund (FUSEX). We have held this position since the start of the year with no changes.
  • Jan 1st NAV = $65.20
  • September 30th¬†NAV = $69.95¬†(change YTD = +5.7%)
  • Current Allocations from Paycheck (deposits) = 100% Fidelity S&P 500 Index Fund.
  • If we break below the 1900 level on the S&P 500 Index sell 50% of the holding in the fund and move them to the Money Market account. (we will send a email to that effect as confirmation.)

If you don’t have Fidelity S&P 500 Index Fund in your 401k you will have a S&P 500 index fund that is similar with Vanguard or whomever the assets are managed by. If you need help simply send us an email with your list of available funds and we will tell you the best match to the allocation. Info@JimsNotes.com is the email address.

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Remember, investing is a journey towards a predefined destination. Sometimes the destination changes, but it will always be about the journey, and the discipline it takes to get there.