Fast Declines

Includes: EEM
by: Roger Nusbaum

The action in the capital markets recently has been a fast decline. There are two types of decline; fast and slow. Fast declines tend to be more about emotion triggered by some sort of threat that appears to be immediate and different. Slow declines tend to not sound the alarm but are actually far more historically significant for marking a true bear market.

The history of fast declines has been that they are better to be bought with the crash of 1987 as an example that most people remember. For however many fast declines most people do remember, there are many more that most people do not remember. It is human nature to place more importance on the current fast decline because it is difficult right now. It may be too difficult to buy a fast decline but the great importance is to avoid capitulating into a fast decline.

Emerging markets and closed end bond funds seem to be getting hit very hard right now but of course these segments have taken big hits before. In the last few weeks, the iShares Emerging Market ETF (NYSEARCA:EEM) is down a little over 13%. That is no fun but not unprecedented. From May 2006 into June 2006 EEM dropped a little over 16% and there have been other big fast declines and the history is that they quickly snap back.

In the last seven weeks the closed end bond fund we use for many clients (we only use one CEF as an across the board holding) is down a little over 15%. Again not fun but there was a similar decline in this fund in late 2010, a similar one of course in 2008, 2004 and a few others along with many 7-8% fast declines--this fund mentioned as a proxy for closed end bond funds. Along the way some CEFs did worse and some did better, but when the group gets hit it happens quickly. And again, the fast declines have typically retraced quickly.

This is the nature of fast declines. They come along every so often and will continue to do so, it is simply part of the deal for participating in markets. They may always be uncomfortable but since you know they have happened before and will happen again occasionally, then hopefully they will become easier to endure.