Penn Wealth Publishing

2017.12.03 Penn Wealth Report Vol 5 Issue 03

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Penn Wealth Publishing Subscription Information Penn Wealth Publishing 9393 West 110th Street 51 Corporate Woods Suite 500 Overland Park, KS 66210 This magazine is subject to copyright protection. All rights reserved. Penn Wealth Publishing, LLC. 4 Penn Wealth RePoRt volume 5 issue 03 03 Dec 2017 Penn Wealth RePoRt Copyright 2017. All Rights Reserved. FRom the eDitoR If there is one lesson investors should take away from the past few weeks, it is just how easily external events can change the trajectory of the stock market within a matter of minutes. The market bulldozed through the "worst months of the year" like a hot knife through butter, and was on target for yet another record week in the waning days of November. On Thursday morning, the final trading day of the month, the major indexes spiked up on news that the US Senate had enough votes to pass the first major tax reform bill in 31 years. Friday, the first trading day of December, was quite the ride. First came the news that some GOP senators were balking on the bill, bringing into question whether or not a vote would be held before the weekend. The Dow dropped about 100 points before Senate Majority Leader McConnell assured the press that the votes were there. The markets began their recovery. Then, at about noon Eastern standard time, ABC reported that General Michael Flynn had struck a deal with the spe- cial prosecutor to, in ABC's erroneous words, "testify against Donald Trump." No matter that the headline was mislead- ing, all major networks ran with the story like rabid dogs. Literally within minutes, the Dow plummeted 300 points. Was this the beginning of the correction everyone has been calling for? After digesting the news and realizing how the press had misled them with hyperbole in the past, investors regained their senses and the Dow closed just 40 points off for the day, and up a whopping 643 points on the week. Later that night, the US Senate passed their version of tax reform. The efficient market hypothesis, or EMH, has a rather defeatist view of investing. Boiled down, it states that every possible fact about a company or an industry is already baked into the share price of all securities, so you really can't "beat the markets." That theory can be proven wrong almost on a daily basis. When I saw the ABC headline on the chyron of the business network I had on at the time, it immediately appeared dubious. Nonetheless, a near-hyster- ical sell-off began within minutes. While the Dow was busy dropping 300 points, I was quickly sifting through my stock wish list—companies that I was prepared to buy if they just weren't so darned expensive (from a valuation standpoint). When emotions, which are anything but efficient, take con- trol of the markets, stoic investors should always be ready to strike, wish list in hand. There is another lesson to be learned from Friday's vol- atility, however. The same emotions that drove the market down in a matter of minutes also helped drive the market up over the past year. To be sure, earnings are coming in solid, business regulations have been cut, and the world economy is looking strong. What if, however, the tax reform bill falls apart in conference and US companies don't get a competitive tax rate? Look for the market to drop 5-10% in short order. What if pot-belly launches a missile that actu- ally lands somewhere besides the Sea of Japan? Look for the beginning of a real correction. While we can never fully prepare for the inevitable unknowns which pop up without warning, this issue takes a look at past market shocks and what course of action would have been prudent at the time. While the next jolt may be completely different, we must still prepare as best we can. MSH Michael S. Hazell editor in chief The fallacy of the efficient market hypothesis

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