Two sides of a penny
While war rages between Ukraine and
Russia, and markets churn under intense volatility, we’ve noticed a strident
dichotomy between two kinds of investor: those who believe this is the
beginning of the end, and those who stay the course. (No doubt, there are shades of grey in
between, but clearly there is a dread developing concerning inflation,
joblessness, world security, and hope for the future.)
The former are selling out of their
investments, locking in profits gainfully won during the past few years,
hoarding cash, but also dabbling occasionally in bargain hunting for depressed
prices and looking for a “score” of a one or two point bounce.
The latter group are more conscious
of spreading their risk amongst a variety of sectors, asset classes…and also
holding cash in abeyance.
The biggest travesty however is that
the market, once again, has become a micro-managed cosmos, dictated by 24 hour
news cycles and instant access to information that is constantly evolving. In truth, no one knows the real catalysts of
market performance, only that data and analytics get tossed aside when emotion
becomes stronger than fact. The reality
lies somewhere in between…war might not cause asset bubbles to collapse, but uncertainty impacts
the landscape in overwhelming ways.
Thus, true money management requires adherence to a set of principles
which guide performance outcomes before exogenous influences can happen.
Corrections and contractions are a normal
part of investing. Consider, though, how
low interest rates during the past decade might have contributed to the bull
cycle by making money inexpensive to borrow and causing stocks to become the
only alternative for investors from which to choose. Now, as central banks begin raising borrowing
costs (interest rates) to protect against hyper ventilating the economy, we
must try to predict the influence of yet another variable. Or perhaps higher interest rates are an
indication of a robust economy that is charging ahead?
In two years of the Covid pandemic we
saw a slowdown in output, hiring, supply chain distribution, and
expectations. If ever there were to be a
“bottom” in the markets that would have been it. And yet, despite the obstacles, the market
performed splendidly. Pent-up demand is
fueling the surge…and the shortages…not a change in the underlying fundamentals
of global growth. Good for the
economy…and good for your portfolio.
Now we ask, “could the market
surge be causing the bubble to collapse upon itself?” Do
valuations sustainably rise in a straight line?
My clients and readers know that I have answered that question again and
again. Markets move in parabolic
cycles that can be quantified for duration and magnitude. Trying to defy the laws of physics and
economics usually leads to poor portfolio outcomes.
So what do we do now? More carnage or more opportunity? The answer correlates to the notion posed in
the first paragraph. Obviously, higher
oil and food prices will lead to greater short-term tension in stock
performance. While tangible assets might
have been a safe haven for defensive money, the question remains for how long
can those asset bubbles sustain?
Look, I get it. People hate “losing” money. However, not all portfolio declines are
“losses”. Reacting with fear or panic to
one’s monthly statement is no more appropriate than “doubling down” on losses
and trying to speculate about where to find the bottom. Preparing ahead of time through prudent asset
allocation mitigates the effects of market volatility, particularly the
declines. Economists, money managers,
and politicians don’t cause market capitulations….gravity does.
Cyclic phase analytics tells us that
form efficiently modulates according to time and magnitude. Zeniths are preceded by nadirs; nadirs are
preceded by zeniths.
It will take time to sort out the intangibles
in today’s market, or to figure out how the first quarter will impact upon the
next 3. We know that change is a part of
the process. In fact, it is the only
unknown that we can predict with
certainty.
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