IS THE MARKET DIFFERENT THIS TIME?
By MARY LYNNE DAHL, CFP®
September 03, 2019
(SitNews) Ketchikan, Alaska - Is what is going on in financial markets different this time? Have we entered a new era? Has there been a paradigm shift? Is the old normal gone? Have the rules changed? Are things really different today?
Well, yes. Things are, in fact, slightly different, but only slightly. Just like last time the market dropped precipitously. And the time before that, and countless times before those. There is always a slight difference, but not a major difference. There is not a fundamental difference in this market correction from prior market corrections. The rules have not changed and this is not a new era in which you should abandon your investment strategy altogether (assuming it was sensible and customized to your own goals).
What is happening today to cause big swings in the market is volatility born out of uncertainty. The stock market does not like uncertainty. It reacts to uncertainty with wild swings, jerky ups and downs of buying and selling, speculation and a lot of trading that is based on very short term goals.
Last year, I wrote that the prospect of changing trade policies between the US and other nations, wars in the Middle East and negotiations on denuclearization of North Korea, among other global problems, was causing uncertainty abroad as well as at home.
Today, a year later, those trade policies have become a trade war between the US and China. The economies of a number of large nations like China and many EU counties show marked signs of slowing down, growing less than in prior years. This is pretty normal and should be expected. After all, it is not reasonable to think that the pace of growth is fixed and steady. It is not; it ebbs and flows. Economies slow down, then stabilize, and then return to a growth pattern. Once in a while, the economy of a nation does fail, like what is happening right now in Venezuela, but we saw that coming, so it is no surprise to most people. And several other countries are in danger of an economic collapse, but these are isolated rather than on a massive global scale. In general, a slowdown in growth of a large, stable nation like the US is certainly not a signal for a change in the fundamental rules of investing.
So, you ask, what is going on? Huge swings up and down in share prices, with exchanges like the Dow Jones , the S&P 500 and the Nasdaq reporting big drops and subsequent surges in prices just a day or two later is nerve wracking, to say the least, especially if you forget about history.
Historically, this has happened countless time before now. And, as I said in the beginning of this article, there are always some slight differences from time to time in market swings. A key difference today is that businesses are not sure if they will have to plan for offsets to major tariffs imposed on exports and imports between nations that trade internationally. That affects a lot of US companies. Not knowing whether or not tariffs will stick, or be rescinded, or increased, is keeping a lot of companies from making plans for investment, growth and expansion, all things that they would normally work towards. Not knowing what kinds of products and services will be targeted is another problem for many businesses that trade across the world. These are huge issues facing corporations and farmers in the US today. Doing nothing hurts their bottom line and paralyzes their ability to move ahead.
You may also be asking if the Federal Reserve rate changes, or lack of rate changes, are to blame for the volatility we continue to endure in the stock market. In the very short term, a rate change can affect market prices, at least temporarily, but generally, the market sees a rate change coming prior to it happening and does not overreact. The current problem for the Federal Reserve is that it has been under more pressure from the White House than is normal, making it harder to demonstrate the reasons for rate hikes, cuts or no changes. This has politicized the interest rate work that the Federal Reserve is responsible for doing. Keep in mind that the Federal Reserve is supposed to be totally independent of any US government oversight. It is designed to act on its own, without pressure from any branch of government or other influence. Today, however, it is constantly being criticized as incorrect in the decisions it makes, and further, responsible for all kinds of economic problems, most of which we have not yet experienced. This pressure on the Federal Reserve results in additional uncertainty about interest rates in the US. It affects US investors and foreign investors alike.
Another thing to know if you want to understand the market during a very volatile period is that there are individuals who are “traders” who love volatility. They use it to try to squeeze pennies out of a buy or sell of whatever stocks they follow. They buy and sell these stocks daily, jumping on price swings like vultures on a dead rabbit, gobbling up as much as possible and as quickly as possible. They are not long term investors; they are speculators. When markets get volatile due to uncertainty, this sparks an opportunity for traders to rush in and make it worse. Interestingly, studies show that most traders do not succeed in actually making a profit on their trades over the long term, because trading costs eat up a lot of profits. Only a few traders make money, according to the studies I have seen for decades on this subject. However, the lure and excitement of day trading keeps them hooked on trying, sort of like gambling.
Long term investors are not traders. As an individual, you should be a long term investor. Take market swings, even big ones, in stride. Know that they will happen. They are historically predictable sooner or later. They may be a signal for a recession on the way. They may not. So much depends on the details, which as I have said, vary slightly in every market cycle.
Finally, if we do slide into a recession, what should you do in terms of your investments? The answer is that your plan should take this into consideration already. This means that you should have enough diversification in your investments to allow part of your portfolio to offset the other part(s) which may be affected by a recession. The same is true of other risks to your portfolio. Your strategy should include categories of investments that offset recession, interest rates, corrections and crashes. It should also include investments in categories that benefit from changes in economic conditions like inflation. Strategies that do this call this kind of planning “asset allocation”. It is very effective in giving an investor a long term plan to go through all kinds of ups and downs in markets. It positions an investor to sleep at night, knowing that s/he is well positioned for the long term goals named in the beginning of the financial planning process.
Investing in stocks and bonds is fundamentally an action of trust, without guarantees. It is not for everyone, but it is for most people in some form. It can be pretty conservative or pretty aggressive, depending on the individual tolerance for risk and the details of his/her goals and age.
Regardless of the extent of conservatism or aggressiveness involved, investing boils down to being part of the fabric of everyday life in most economies. It means that an investor knows that businesses will continue to make and sell products and services that other people want. It means that the investor will lend money to corporations and government agencies that need to finance growth or infrastructure like roads and bridges across the country.
Although there is generally no guarantee of a return on the invested dollars, most of the time these businesses and government agencies do make it worthwhile to take the risk of investing.
Technology is not going to go away; it will evolve and grow, probably beyond our wildest expectations today. Music will continue to attract people to listen and buy. Food will continue to sell because people will continue to eat. No surprise there. People will continue to wear clothes (I hope) and be interested in fashion.
Transportation and housing will continue to be purchasing goals for many individuals, and the companies that offer these products and services will continue to do so. Consumers will continue to buy devices to communicate and compute. Artificial intelligence is inevitable, like it or not. All this stuff will be bought and sold to consumers and ordinary people worldwide. People all over the world want to buy things and have a better lifestyle. All of this stuff is the engine that propels markets and economies.
Regardless of the daily swings, through ups and down in market prices, the world will continue its gradual, upward march toward growth, with periodic dips and surges. As an investor, expect this. Plan for it. Offset it with common sense strategies.
What is the bottom line? Can you guess? Here goes: “Have a plan and stick with it.” That is the bottom line. Join the ranks of people who have a plan, understand it, sleep well in spite of market volatility and reach their long term goals. Financially, what better outcome is there than this?
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