Sick and Tired. It’s a common expression that’s probably as old as the hills. In recent months we’ve heard each word so many times. Millions have gotten sick. Multiple millions more are tired. If you’re not sick or tired right now it’s only because you are legitimately sick and tired.
So I thought I’d use this expression to try to frame the current landscape.
Before I delve into the state of the markets, let’s start with the state of our minds. Since our state of mind has so much to do with our success in the markets, this seems appropriate.
When we’re physically sick, we generally know what ails us and how to expect our bodies to react. We know what to do or take to try to get better and, for the most part, we accept it and stay patient (no pun intended).
But when we’re physically tired we are potentially in much more danger. We endanger ourselves by looking to be done with whatever it is that is wearing us out. We try to take shortcuts. We lose our patience in every way. We are irritable and capable of doing almost anything erratic because we simply aren’t thinking like we normally do.
A good example of this theory comes from mountain climbing. I’ve seen stories about how the majority of injuries suffered by climbers are on the descent, not the ascent. While in Colorado a few months ago, this was reiterated to me by a local guide. He said the methodical care climbers showed on the way up the mountain often yields to poor judgement and hasty decisions on the way down. They’re tired, both mentally and physically, and they fall victim to a lack of concentration. They either falsely believe the dangers don’t exist on the way down like they did on the way up or they are just so tired they rush themselves to try to end the pain. Ironically, this is where the greater odds of trouble lie. Being tired leads to desperation, and desperation is the precursor of pain, he said.
That phrase really caught my ear since I have found myself saying the exact same thing to investors from time to time over the years – desperation is the precursor of pain. This can be a desperate feeling to avoid perceived threats and it can be the desperation to keep up with the Joneses and recklessly speculate to not miss out on the upside. Both are desperate mindsets that lead to pain.
The point to be made here is that when we are tired, it is a terrible time to make big decisions – financial or otherwise.
So let’s shift to the markets and view them through this lens of sick / tired.
Is the market sick?
It’s a fair question given all the historic action these past six months. The Treasury Department and Federal Reserve have acted like doctors making house calls at various times. So there are certainly some checks in the box of ‘sick’ for the market.
But I contend the more accurate assessment is that the market is ‘tired’. It has just rebounded in a truly impressive way and the corporate earnings picture that supports these higher prices have largely been positive surprises. But the legs of the market are weary in my mind.
An uncommon yet highly predictable power is also at play as a result of this recent market strength, particularly in the technology sector. I’m referring to the new supply of stock coming into the market by way of IPOs on the near horizon. Like all things, stock prices are a function of supply and demand. A historically high amount of supply is coming to the market in the weeks ahead. It started last week with the largest software company IPO ever, a company called Snowflake. There were others too and there are about to be even more. The impact is that institutions and individuals that want to own these newly listed companies usually need to sell at least some of the stocks they already own to make room for these new names. Past periods of massive IPO issuance has shown us that these influences last a handful of weeks before equilibrium is found. This is what happened in the 2012 IPO season highlighted by Facebook and then again last year with Uber and Lyft. This new supply flooded the market for a short while, but indeed proved to be short-lived. That’s likely to happen again this time around.
A lot of factors converge to make it very possible that the next 10% market move could be down instead of up. But these aren’t the types of factors that would mean much about the value of the market in two years’ time.
For people who are concerned about their portfolio’s balance in 30 days, this might be a good time to trade out and hope to time precisely when to get back in. This person would need to have a very high tolerance for risk and no concern about taxes. I’d suspect he or she would also need a high tolerance for stress – and an accurate crystal ball wouldn’t hurt either.
For those of us more concerned about our portfolio’s balance a few years down the road, this is akin to a rain shower passing over a garden to nurture its future growth. Without the rain, the garden won’t survive. Without corrections, markets are destined to fail.
Sticking with the theme, without proper rest a tired market will turn into a sick one.
Let’s now address the elephant in the room, which is the upcoming election.
This is now the 8th Presidential election in my time doing this work. And the marketing machines within the investment community have constantly led people to think these elections are the end all, be all for the market. They aim to sell you something based on their blend of fear, greed, and confusion. Case in point, this is the opening salvo of a marketing ploy from a group trying to get people to join their upcoming webinar:
“Which of the five election scenarios could make you rich? Trick question. All of them….and none of them! This election is poised to have a HUGE impact on the market.” They continue to later say:
“This election could make you a millionaire – if you play your cards right. But the stakes are sky-high…..get rich or lose everything!
I’m serious! This is really what was fed to potential attendees. And I just chose one. There are tons of them.
Combine this with virtually every news outlet – TV, radio, internet, you name it – and how do investors stand a chance? You are their targets. Your wallet is their finish line and your emotions are their course map. There’s no genuine desire to help you succeed in reaching multiyear milestones. And there’s certainly no verifiable ability to do so. They use their various powers of persuasion to spur you into action. And politics are always a hot button.
I want to be an antidote to this type of poison.
Yes, politics matter; and yes, they do shape the course of the economy and the nation. They factor into the costs of doing business and the amount of every dollar of our earnings we keep. I’m not side-stepping any of these truths. The workforce is impacted, social programs are too. But as I’ve said for these prior 8 cycles, the results of elections simply do not carry the full force people imagine they will. If you love who was just elected, you’ll likely be disappointed by how little of their agenda they accomplish. If you can’t stand the person or their potential policies, take solace in the same fact.
As we work our way toward the election, be ready to see and hear our country at its worst. There won’t be many messages of hope that are backed up with thorough plans. But there will be forecasts of horror, constant fear mongering, and callous personal attacks.
The game of politics is, unfortunately sick; and I am hard pressed to think of anyone I’ve spoken to in a long time that isn’t tired of it.
Before we lose our hope, we need to remember that politics are a necessary evil. Governments are best guided by political negotiation and not by dictatorship. Everyone (in this country) is entitled to, and even should have, their personal political perspective.
My role in clients’ lives isn’t to either reinforce or dissuade whatever personal political preferences they have. It is to guide them and their capital through the noise of the world, political and otherwise, to stay focused on strategies that give them the highest probability of reaching their goals.
These goals couldn’t care any less who is in the White House. Their retirement income stream can’t rely on who is the Speaker of the House. Their surviving spouse needs assurance and comfort, not a civics lesson. And I know for sure they won’t be content if their children or their charities don’t reap the fruits of their labors because they were waiting for sense and harmony in Washington before they committed capital to the markets.
At this particular moment, the market seems balanced by opposing forces. On the negative side you have this issue of new supply I mentioned, a concern about valuations, China is again in the headlines, and the election is looming. The positive side is ironically led by the degree of negativity that still exists about the states of the virus and the economic recovery. Never forget that negativity is needed to avoid dangerous excesses. Perhaps the largest positive is the adage “don’t fight the Fed” and the Fed is clearly keeping the cost of capital cheap for a long time to come.
If these opposing forces cause the markets to churn around a bit these next few months, it would be a good thing in my view. I’d suspect it would be a healthy pause within an upward trend and not the changing of the guard to a protracted bear market.
- The current environment has made us all physically and emotionally tired. There’s no shortage of culprits – social unrest, market volatility, an ongoing pandemic, and an ugly election looming. These things could fatigue us and chip away at our resolve. Seasons like these can pull our focus toward only what is bad and have us minimize what is or what could be good. We’d all like things to be better NOW. But that’s not realistic. There are no shortcuts on this mountain.
- Elections matter, but not so much to your investments. Talking heads and even intuition might say otherwise. Empirical evidence, however, only proves that elections generate a lot of headlines and knee jerk reactions. Those who have been around the investment arena for a while know just how dangerous headlines and swift reactions can be.
- Most importantly, if you or a loved one have gotten sick these past several months, I hope you’ve had a quick and complete recovery.
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