I send an e-mail out most Fridays called "Friday Thoughts" that contains my observations and opinions on what has peaked my interest that week. These are written by me - not a ghost writer, subscription service, or freelance journalist. That's why I can't guarantee that I'll write one every week. If you would like to receive this in your inbox almost every week, e-mail me at firstname.lastname@example.org and I'll add you to the list.
I hope that your week has been a good one. Since last week's Friday Thoughts, the stock markets have been on a bit of a rollercoaster ride. We've had very little volatility in the stock market over the last several years, so many people have been a bit unnerved by the last week's moves. I'll take just a few minutes to discuss my theories on these swings and what I am thinking may be coming. Due to the nature of a blog, I can't get too specific and most definitely can't make specific suggestions on what to do. If you would like to discuss any of this and how it impacts you, either e-mail me at email@example.com or give me a call at 803-774-2947 and I'll be happy to schedule a time for us to talk.
What's causing this?
As I wrote about a few weeks ago, the bond markets are often a signal of what's to come in the economy, and in some ways, the stock market. That's due to the nature of bond investors who will be receiving interest payments for years to come. They want to earn an interest rate that will make the risk of rising costs, default, and taxes worthy of their investment. We have seen short term (2 years and less) rates slowly trending up for a few years now while longer term rates have stayed the same or gone down. Over the last few weeks, that has begun to change.
When the Federal Reserve last met, they said that they would be watching inflation closely this year, as they expected it to increase. Many economists have felt that since we have historically low unemployment, inflation would show first in rising wages. Last Friday, February 2nd, the government announced their monthly jobs report and it included the fact that wages increased at an annual pace of 2.9%, the largest increase in years. Many took this as the sign that inflation was here, and they started pushing longer term bond rates higher because of those expectations.
Suddenly, the stock market took notice. I find this somewhat interesting, as the longer term rates had been climbing for a few weeks, but the stock market hadn't been impacted. See the chart below from CNBC.
The fear is that as interest rates rise, the cost of borrowing goes up, and businesses who have relied on cheap loans will be adversely affected. And now less home buyers will be able to buy the home they had hoped. And credit card rates will go up, hurting the consumers. And on, and on.
There are plenty of opinions around about what will happen to interest rates and the stock market going forward. I suspect that most of them will be wrong. No one really knows what will happen, but they feel they must put an opinion out, without regard to the chances of their prognostications being right.
I suspect that we'll see the volatility continue for a while as the Washington economists gauge the economy and rising wage pressure and Wall Street reevaluates risk in a rising interest rate environment and try's to figure out how to price in the new risk. We haven't seen interest rates go up over a prolonged period of time for more than 30 years, so this is all new to a lot of people.
Beyond that, my crystal ball is in the shop for repair.
So, what can we do?
Someone told me long ago to only worry over the things that you have control over. Since we have no control over the stock market, we should try not too worry about it. That's easier said than done. This is why I have been a proponent of understanding each client's tolerance for risk and making sure that they understand the risk in the investments that they own. One of the worse mistakes an investor can make is to "get out until things calm down". This often means that they are selling when their investments are down and buying back only after they have gone up. This is the exact opposite to "buy low and sell high".
Technology is providing some great new tools to see what kind of risk is in a diversified portfolio and I have enjoyed implementing these tools. Sometimes, even I'm surprised. If you would like to check your portfolio to see where it is on the risk scale of 0 to 100, click here.
The one group of clients that should be a bit concerned are those who are having to sell some of their investments in order to generate a monthly check. Volatility works against them, because as shares drop in price, more must be sold to generate the same end result. That group of clients need to be sure that they are taking reasonable risk and have a sustainable withdrawal rate to minimize eroding their principle through this period.
As I said at the beginning, if you have concerns about your situation, please e-mail me and we'll schedule a time to talk.
My personal opinion is that this market pull back is actually good for the market in the longer term. Markets need to take a breath from time to time. When they go too long in one direction or the other, they wear themselves out. The US stock market has reached a point that it needs to catch its breath and find new investors who have been on the sidelines because they don't want to "buy high". I have several clients and prospective clients who have felt that way for months now. And now we are looking at this as the opportunity to put that money to work.
Warren Buffet has a famous saying - "Be fearful when others are greedy and greedy when others are fearful".
And finally, a story from Dave Ramsey that he tells in his Financial Peace University class that I'll paraphrase. He had the chance to spend some time with a billionaire and in their conversation the billionaire offered his favorite book that he said set the foundation for his success. Dave was eager to find out what book could have been so full of wisdom and insight to have helped propel the success of this man. He at first thought that it must be the Bible, and said so. But the man said - no, while that's important, this is such an important book, I read it to my family every chance I get. The Tortoise and the Hare. Dave said he was struggling to see the connection and the billionaire said excitedly, "see - every time I read it, the tortoise wins. The tortoise wins!"
This is not a time to worry if you're falling behind or catching up. This is time to make sure that you have a plan in place and you are staying true to that plan.
I wish you a great weekend and try not to worry over what you can't control.