The market opened this morning in a very chaotic manner which is indicative of the kind of reaction that comes from a market which is dominated by trading and non-economic decision-making versus investment based in business fundamentals. Quite timely given our commentary recently about the disfunction caused by the ETF phenomenon. Incidentally, even the talking heads on CNBC were referencing the potential that ETFs could be at the heart of the "dislocation" that seemed to be occurring in the trading apparatus this morning.
Who really knows? And that is not comforting!
However, it is not as if we haven't seen panic-type markets before. We experienced the one day drop of 22% in the DJIA in 1987 and the wild swings in 2008-2009; much more severe than today's move. And since then there have been several "headline events" such as the Greece debacle, Dubai Ports World, disruption in Cypress, geopolitical tensions in the Middle East, just to name a few. This underscores the need to be centered on a long term investment approach, similar to that which we provide. One which is based in sound fundamental research and is not dependent on the move in stock prices on any given day, week, month, quarter or year, for that matter!
Ironically, this down move across the board is happening at a time when we think some of our most important themes are showing signs of kicking in after being on hold for the last couple of years. These would include the transformation towards virtualization across the data center universe, the advent of sensor technology in wearables and the "Internet of Things" (IoT), the transformation of the enterprise into a fully cloud-based platform, and others.
These are just some of the business innovations that we are focusing on at this time. We expect that regardless of where the markets ultimately settle today, this week or this month, these trends are and will continue to be powerful drivers of business and ultimately portfolio returns in the years ahead.
That said, we have warned in previous commentary that the market may throw a "hissy fit" when the Fed decides to finally raise the target for the Federal Funds Rate from zero. This may be that "fit"! Followers of our commentary know that we have been advocates for raising rates for some time and it would seem the Fed is finally ready to acquiesce. While it is impossible to say that when the Fed meets in September they will definitely raise rates, it is likely to happen by the end of the year. Will there be more market turmoil when the event finally comes to pass? Possibly, but likely the "return to normalcy" that a Fed rate hike would bring will ultimately allow the market to move higher as it turns its focus back to business, where it belongs.
Whether or not recent market weakness is solely due to the expected actions of the Fed, or China's so-called meltdown, not all that unusual for a market that has had a meteoric rise in just a matter of months, the key is to be centered and still in volatile times, and even look to buy great businesses while they are on sale!
