Parallel
Disconnect, redux
Truly, the tariff wars,
widening wage and wealth gaps, and fiscal (political) inertia are starting to bear
down upon people's minds. Investors
don't need to pore through reams of financial data to know that something just
doesn't feel right about their own economic circumstances.
Their first warning
sign is a term I coined decades ago, the parallel disconnect:: the appearance of two phenomena, seemingly
inexorably linked by trajectory and velocity and, yet, not really connected at
all except by illusion. In this case
it is the counterfeit conflation that the stock market and the economy are one
and the same.
Indeed, in the last few
weeks the stock market is down nearly 9%, wiping away nearly all of the year's
gains, while the average P/E (price to earnings) ratio on all S&P shares
has fallen by more than 10%. By far, the
worst month in the global equity realm in at least 6 years. (All this in juxtaposition to the economic
"good news" about historically low unemployment and substantial
corporate earnings expansion). These market
reversals are disappointing data that no one counted upon nor has an easy time
processing.
Why, when politicians,
economists, statisticians, and others are telling us that "things are
improving" do so many feel so insecure about their money?
It is noteworthy that
such a conundrum is both financial and psychological
because the hardest thing to internalize
during a market capitulation like the one that has happened is not the data
itself, but how we feel about it. When
the monthly account statement valuation begins to recede, the pain cuts too
close to the quick.
Thus, we have two very
distinct issues with which to deal: analyzing the data and what then to do
about it.
Understanding
what's there
First, I must say that
investing involves always preparing for an eventual cycle collapse. It is part of the gradations of analysis and emotions
that one experiences when investing... the euphoria of bull market success and
the despair of market collapse.
Speculation and trading are for the brave and should not be the primary
component of your investment calculus.
Building from the ground up...like creating a pyramid...will secure your
platform and provide the kind of conservative momentum you need to build peace
of mind and a consistent "floor" to the portfolio.
Much is being made of
the Fed's lack of compassion, or economic comprehension, as they have embarked
upon a series of rate hikes designed to stem the tide of inflation and over
production. Are you personally feeling
"over production" in your household GDP? However, the unrealistic expectations that
everyone felt because stocks became their default investment...because of low
interest rates this past decade....expanded the risk quotients for the market
to the point that overvaluation has surely brought us near to, if not at, the
top of the current expansion cycle in equities.
Once again....not the same thing as the economy or its improving underlying
fundamentals.
Volatility is the norm
in the financial markets. Let's begin
with the notion that all economics are cyclical, parabolic by nature. Being seduced by the siren call of your recent
equity good fortune has unfortunately made you complacent to the underlying
principle I have just described.
The good news is that
by applying this cyclical telemetry to your portfolio, it becomes easier to
"clean up" all the exogenous noise surrounding current events such as
tax cuts, tariffs, trade wars, interest rates, political invective, and climate
disasters. Cycle phase methodology is
not about "timing" the markets.
Rather, it is a mechanism for building prudent asset allocation
probabilities based upon sequencing the data correctly to avoid over- weighting
laggard trends while positioning into opportunity that is current and
enduring. Time, not timing, is the quintessence of reducing portfolio risk. Keep in mind, asset allocation plays a greater
role in the probability of portfolio capital appreciation than does any
individual security within that portfolio.
When the headlines are
jumping across your television screen, try to be more discerning as to how
those data and those analysts giving you the information do....or don't....play
a direct role in the long-term potential of your particular circumstance. And recognize that cycles occur...both up and
down....and that they pass.
And if you can't
stomach the risk, you probably shouldn't be investing at all.
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