Remain
in your seats
I think an attitude
adjustment is called for.
As I explained last
week, markets are always, and most particularly, susceptible to disruptions and
tumultuousness when they trade so very close to upside inflection points. And sure enough, all it took last week was a
series of tweets, pronouncements, and threats from Federal officials on a
myriad of topics ranging from tariffs to judicial review to set off a panic
that shaved several percentage points from the apex of the Dow Jones and a slew
of "basis points" from the bond market in response.
But here is the key
question: "is every cyclical event
that befalls the economy necessarily a bubble, a crash, or a crisis?"
Look, it is normal to
have aberrations and swings in economic data, even if they are only inspired by
silly rhetoric or histrionics. There is
risk in everything in life, and no circumstance really traverses a linear reaction when we know that the world is made
up of highs and lows tracing a parabolic curve.
One must accept that fact and embrace the ebb and flow of life's
currents.
More importantly, one must
decide if they are mentally tough enough to accept the risks that investing
represents. The surest way to succumb to
panic is to be absent an unyielding methodology that one has faith in and which
best responds to one's ability to withstand those risks. Remember,
it's not the gains you make that solidify a portfolio's progress, it is the big
losses you are able to avoid...the kind from which recovery is an
insurmountable and time-consuming obstacle.
And most of all, withdrawing from the process altogether is a prologue
to fear and failure. Performance is a
long term proposition and not for the faint of heart.
Yes, there are current warning
signs which might inhibit the market's unbridled journey upwards. For example, the public's obsession with
interest rates is forcing investors literally to micro-manage their portfolios
unnecessarily. A fascination with the
Fed's cash reserve balances becomes the precursor to economic activity that
hastens a staccato pace of trading and an overabundance of crisis-mode
manipulation. It is wrong to affix a
binary choice to those kinds of data such that the nuance of investing becomes
entangled with instantaneous rebalancing of portfolios or, worse, selling
everything to avoid the news at any cost
Fortunately, prudent
methodology can help to mitigate the challenges of understanding micro data
while still acknowledging that fluctuations happen even when the trajectory is
correct.
Wait
for the captain's instructions
It is fruitless to try to
predict the actions of the Fed or global central bankers. Suffice it to say that stocks are at or near
record highs and bond yields are at or near historical lows. In each instance, a reversion to the
mean...away from the maximum extreme....would not be a surprise, nor a
catastrophe the kind of which is being portrayed by today's activity and
behavior.
Anything and everything
is possible, but a regression back to a recession is not the most likely
scenario. Real bubbles are usually the
result of excess....and few would say that, with the exception of the S&P,
the economy as a whole is in an excess.
That type of leverage is in the rear view mirror. Nevertheless, brace yourself for more
frothiness as a result of political posturing and other "exogenous
news" events that capture the imagination of the media, pushing aside the
real underlying story of the global recovery and market success.
However, one of the
most insidious historical changes that
has taken place is the omnipresence
of the internet and access to information instantaneously through the media and
other technologies. A preoccupation with
this thirst for news influences upticks and downticks in an unhealthy way, and
sometimes is irrelevant to the real situation on the ground. Certainly, it is useless for the
"average" investor to be stressed by every nano-bit of information
because it causes too much anxiety and has the potential to derail even the
most steady of portfolio progressions.
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