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Why Investors Shouldn’t ‘Buy the Dip’

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The global market meltdown is turning into a rout as investors who ignored the warning signs of overvaluation, weakening earnings and revenue trends, and deteriorating internal market dynamics may now be heading for the exits. As you try to rationalize your allocation and equity market exposure, you may deem it appropriate to stick with investments in countries with the strongest economies. Reasoning, stronger eco-markets should behave better than markets in countries with economies under pressure.

The U.S. has had the strongest economic recovery so far, followed by England and Germany. These could be better bets than the Asia-Pacific and commodity-based export economies. As China ’s economy falters, fear of worldwide growth stalling is leading to market carnage and currency devaluation wars.

The velocity of declines in China, Asia and emerging markets is reminiscent of declines on Black Monday in 1987 when the Dow fell by more than 30% in two trading days. What many people don’t remember about that year is that the popular U.S. indexes bounced back by the end of the year.

We believe market conditions are ripe for further declines of 20% or more, registering a classic bear market decline. However, we would not be surprised to see the U.S. and strong eco-market equities stage a comeback by year-end, erasing a good portion of the damage. Right now, we consider U.S. Treasuries to be particularly attractive on the flight to quality trade. Bonds, much maligned on rising interest rate fears, are not dead yet and look attractive as equity valuations adjust. We believe the Fed is likely to abandon any plans for an interest rate hike cycle for quite some time.  

We expect bear market declines will cause valuations to look more attractive than they have for several years which may lead investors to move back into safe haven markets. Misplaced calls for monetary authorities to tighten may fade along with hopes of improved economic growth. Outside the U.S., we expect to see additional monetary support to shore up ailing economies. We anticipate additional easing to provide a backstop for excessive market declines in Asia and emerging economies.

Macro market risks, which were being ignored by investors, are becoming quite evident. Still overlooked, we feel, is the level of government debt that has piled up as economies struggled to fight off financial contagion. Economics 101 would suggest the tremendous debt burden incurred to keep financial systems functioning is a drag on economic performance even at extremely low interest rates. It’s clear to see these effects in China, Brazil and Russia as slow world growth compresses commodity prices. In the U.S., debt levels soared by 250% to prevent the 2008 Financial Crisis turning into a depression. We believe the low 2% growth rate is a clear expression of the drag $18.5 trillion of debt is having on the economy.

We would strongly suggest that investors should not “buy the dip” because macro and market risks remain elevated. We are not out of the woods yet by a long shot. When markets’ prices are reverting to mean value from overvalued levels, we believe “cash is king” and the safest way to protect capital. WBI’s process systematically raises cash as market risk increases to protect capital. When market conditions indicate risk is abating, our process will seek to become more fully invested to participate in positive market returns.


Past performance does not guarantee future results.

The views presented are those of Don Schreiber, Jr. and should not be construed as investment advice.

All economic and performance information is historical and not indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this document, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. WBI Enhanced SMA Program accounts are subject to investment risk, including the possible loss of principal amount invested. The ETFs used in WBIEnhanced SMA Program accounts may invest in other ETFs, mutual funds, and Exchange-Traded Notes (ETNs) which will subject the account to the additional expenses of each ETF, mutual fund, or ETN, as well as to the risk of owning the underlying securities held by each. Options on securities held in an ETF may be subject to greater fluctuations in value than an investment in the underlying securities. In addition, ETFs may be subject to one or more of the following risks: market risk, model risk, management risk, dividend risk, growth risk, value risk, debt security risk, foreign market and currency risk, high-yield security risk, small and medium company risk, portfolio turnover risk, securities business risk, mortgage-backed securities risk, new fund risk, and trading price risk. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, you are encouraged to consult with WBI or the professional advisor of your choosing. All information, including that used to compile charts, is obtained from sources believed to be reliable, but WBI does not guarantee its reliability. Information pertaining to WBI’s advisory operations, services, and fees is set forth in WBI’s current disclosure statement, as same is on file with the United States Securities and Exchange Commission, a copy of which is available from WBI upon request.


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