A Correction Around the Corner

Recently, the market has climbed to an all new high. Yet the higher the market goes, the less investors seem to care. One of the main reasons for this is that only about 20 companies of the S & P 500 reached 52 week highs in the market; the lowest number in a year. Furthermore, the benchmark US 10 year note saw a drop in yield of 2.44% last week, which is the lowest in 12 months. So, why is the market at an all time high? How can the market justify this growth? It's the Federal Stimulus along with the government holding down interest rates.

The Federal Stimulus, which exceeds $4 trillion since 2008, continues monthly at $35 billion. This is a huge unnatural catalyst for the market. Granted, the Federal Stimulus has proven successful; however, it is only a short term solution with negative long term effects. The Federal Stimulus can only push the market so far through monetary injections before drastic volatility follows. Investors are well aware of this. Over the last 6 years the market has been quite the roller coaster. Only now we are at the highest point of the roller coaster with nowhere to go but down. In a phone interview with Bloomberg, Hayes Miller, head of multi-asset allocation for Baring Asset Management Inc, said “Breadth is suggesting that the market is stopping. This is not a good starting point for buying equities at this price.” This suggests a correction is around the corner. Citi Group CFO John Gerspach said last week that trading revenue could fall as much as 25% in the second quarter, and JPMorgan Chase & Co. estimated a 20% drop. The question is will the cycle of stimulus continue like it has over the last few years? The evidence seems to point that way. If the market does take a 25% drop, how much Quantitive Easement will the Fed pump into the market to offset the correction? How much will that add to our Federal Deficit, and how much longer can Wall Street ride on the coat tails of Uncle Sam?

Volatility is a trend that we will see for the next several years. Fortunately today, investors have been able to recoup losses over the last decade thanks to Uncle Sam's efforts. However, with a growing Federal Deficit and extreme deflation, volatility will continue. With the market at its highest level in history, there couldn't be a better time to redirect your portfolio to financial guarantees. Now is the perfect time to use the Federal Stimulus to your advantage before it may be to late. Differentiated strategies must be explored to keep financial goals for your portfolio on track. So how do you navigate through a choppy market to achieve retirement goals? You simply trade away the down side of the market with a moderate return, known as annual reset. Annual reset is a concept that requires financial institutions to match deposits into fixed assets on a dollar for dollar basis, as opposed to leveraging assets with ratios as high as 20:1, which cannot bypass volatility. Annual reset will ensure that you can never go backwards on the growth of your portfolio. Truth be told, this strategy has outperformed the market since 2000. Investors and retirees alike are repositioning leveraged assets to products offering annual reset for several benefits, including both lifetime income and exempting themselves from any volatility in the future.

Without financial concepts that use annual reset, how can you ensure your financial goals are met? What many fail to realize is how disastrous a market downturn really is. Let's take a closer look at this. Let's assume for simplistic purposes that the market takes a 50% downturn. If that downturn was followed by an immediate 50% upturn, you are still down 25%. An easier way to see this is to start 4 quarters and take 2 away (50% loss). A 50% gain of $0.50 is $0.75, putting you a quarter short of where you started. So respectively, any loss must be followed by a much higher gain in order to get you back to even. The question is, how many downsides can you endure before you are unable to pull your portfolio above water, let alone achieve your financial goals. Annual reset bypasses this negative event and allows you to only move forward.

With unnatural solutions like the Federal Stimulus, the market will continue to have extreme highs and lows contrary to what the natural numbers represent. A sure way to navigate through these extremes is to trade away all future volatility with moderate upsides. This will ensure that unforeseen events brought on by a struggling economy will not disrupt your personal financial goals.