Wave Magazine – Calm Above, Turmoil Below: A September to Remember?

The 1920s began after World War I with the last American troops coming home from Europe.  It was a decade of change when American citizens began owning radios, telephones, and cars, which created a requirement for good roads. Rural farmers began to leave their farms for regular paycheck opportunities in the textiles, tobacco, and furniture industries.  It was a time when women shortened, or ‘bobbed,” their hair and men shaved off their beards. The decade began with a roar and ended with a crash.

Could it be déjà vu all over again? Let’s begin with the understanding that it’s not about a prediction. It’s all about the preparation. Our longstanding goal is to support investors in preparing for the good, the bad, and the unforeseen. The stock market this year has been as quiet as a library, which is disconcerting. The index hasn’t seen a 5% correction based on closing prices since the end of October 2020, says The Wall Street Journal. Writer James Mackintosh goes on to say, “The last time the S&P 500 was this serene for so long was in 2017, a period of calm that ended with the volatility crash early in 2018, although back then it was quieter for much longer.”

Dent Research reminds us that the S&P 500 was off 20% in 2018, followed in 2020 with a loss of 35%. The current expectation is for the third loss to be more severe than the first two. It might be something like a 47%-50%, per Dent Research. With stocks up 100% as of August 17, 2021 since the last dramatic selloff, according to CNN, some worry about the continued success of stocks. Right now the market seems to be driven by FOMO, or fear of missing out, and TINA, there is no alternative to stocks.  With interest rates so low, the risk of owning stocks seem to offer the best hope of gains. In the past, investors would have moved from stocks to bonds or vice versa. Today they just switch from one sort of stock to another, so falls in one may be offset by gains in another. Everybody loves the melt up.  It’s a wonder as to how many investors are prepared for a melt-down.

This observer is among those who hold theory that stocks keep melting up thanks to a massive bubble that is being inflated by very inexpensive money and government stimulus. “Stocks haven’t been so expensive since 2000, while a bubble mentality is obvious in the wild overtrading of fashionable stocks. It is undeniable that stocks are far more expensive than usual. But bubbles usually involve lots of volatility as they inflate, not a cam exterior and turmoil within, because every little price drop is magnified by others fearful that the bubble is about to pop,” per The Wall Street Journal.

This time around, the primary threat to stocks may be the Federal Reserve, as opposed to the market’s overvaluation. Now central banks around the world have convinced people they have all of the tools in their tool boxes so that the machines will do the work of heating and cooling the economies so everyone stays comfortable, spending like there’s no tomorrow. Don’t we wish it was that simple.

Take off your rose colored glasses, that discolor everything, and give some thought as to how the market might react if the Fed began a normal rate hiking cycle, making cash attractive again. Since such action could bring the turmoil below to the surface, which won’t be pretty. Now is the time for savvy investors to put your exit strategies in place to potentially keep your assets from being handed to you.

John Grace owns Investor’s Advantage, a personal finance planning firm in Westlake Village.

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