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Certified Financial Planner Practitioner™
Full Picture Financial

Is the Market Pulling a River Phoenix?

I would call the 80’s my formative years.  There are things I remember from the 70’s – my first snowfall, velour clothing, seeing Star Wars  – but, I was 5 to 15 years old in the 80’s and the constant bombardment by media of the decade helped shape my worldview.  Among many others: Pet Rocks, Roller Parties, corduroy, the Walkman, Break Dancing, Neon, the DeLorean, those rubber vacuum gaskets Madonna wore up and down each arm, Atari, Swatch, parachute pants … I could go on and on.

It’s not just the stuff that was sold to us back then but, what happened to others that left an impression.  I saw a Time or National Geographic article in a doctor’s office with several photographs of a 19th Century mariner who was tossed overboard in a storm but was perfectly preserved in ice for almost a hundred years.  That was spooky (and may be related to why I don’t go on boats after dark).  I remember hearing over the radio, perhaps in that same office, Rock Hudson had died of a mystery disease.  I was brought into the assembly room at my elementary school to watch the Challenger launch and, subsequently, fail.

My family had a huge influence on me but, popular culture was taking our world by storm.  I saw people on the big and small screen whose careers I could follow, I could rally around, and, with whom, I could possibly identify.  I didn’t fancy myself another Magnum P.I.  Nor did I find solace in the challenges Screech (Saved by the Bell) overcame at Bayside High.  I zeroed in on different actors.  One was named River Phoenix … he was brilliant in Stand by Me and hit the bullseye as a young Indiana Jones in The Last Crusade.  He was a natural at his craft and I followed his career more closely than others.

By the time the 90’s came around, I started to consider myself somewhat of an adult.  I thought I was ready to deal with the nuanced layers of the world.  In 1993, River Phoenix, as you may remember, collapsed outside an L.A. night club and died.  It was one of the first celebrity overdoses to reach my consciousness.  But, what stuck with me isn’t that he passed away early.  Yes, like others, my thoughts fell to what a waste of talent it was.  What remains is what I understood as the cause.  It was not only drugs but the combination of drugs in his system.  To make a long story short, River’s central nervous system went into shock because he had taken uppers and downers at the same time.  There was somewhat of a battle inside his body and, in essence, no side won.

How does my morbid stroll down memory lane apply to your personal finances?  Well, I view the times we’re in as being a sort of “combined drug intoxication” of the market.  We have forces trying their best to push the market forward.  Who can argue that the surge we got from the tax cuts disproportionately benefitting the wealthy was like cocaine for the market?  Rising interest rates and political discord are the morphine bringing us down.

Volatility had been creeping back into the market, even before those in Washington decided to goose the market with unneeded economic stimulus.  Recently, the markets have experienced 2-3% swings in its valuation, sometimes within the same day.  That volatility indicates the market is going to make a noticeable move in one direction or the other.  We all just assumed it would move up, due to the tax cut news.  And, it still could, in the long term.

Here are the forces moving the market.  In the interest of brevity (never one of my strong suits), I am not going to completely flesh out the effect of each on the economy.  You are more than welcome to contact me to discuss how each one affects your portfolio.

 

Positive

Tax Cuts – This is economic stimulus at its most basic.  Leave more money in the hands of consumers and they will buy stuff.  Leave more with companies and they should hire or put money into innovation.  I say this is a positive because of its intent.  Unfortunately, we’ve been through this, three times in three decades, and it has never worked as intended.

Consumer Confidence – While partly tied to aforementioned Tax Cuts, companies at home and abroad are realizing record profits and jobless claims are down more than expected.  Amazon absolutely crushed expectations and took off in January but, even their story could turn negative if the market catches wind of how shoppers are abandoning Whole Foods after changes made by Bezos’ team.

 

Negative

Partisan Discord – This isn’t your father’s political rancor.  This is lying and obfuscation on unprecedented levels.  There are no alternative facts or deep state.  The smokescreens being put out to keep a tenuous hold on power are criminal.  Period.

Social Re-Engineering – Without assigning blame, I believe it’s safe to say all cultures have marginalized certain groups (usually those in the minority) and abused positions of power.  In order to reach a homeostasis for society, we must first endure the dramatic over-correction brought on by years of various transgressions.  If rich white men enjoyed centuries of control of industry and monetary systems, how likely are they to be thrilled about our transition to shared power and responsibility?  And, who runs the stock markets?  Exactly.

History – There has only been one Bull Market (remember: Bulls Charge / Bears Hibernate) to last longer than the one we currently enjoy.  Due to natural cycles, the party must end at some point.

 

Both Positive and Negative:

Rising Interest Rates – There is a lot to unpack in this one.  This is bad because it means that people will not be able to afford financing certain purchases and less goods and services will be acquired.  On the other hand, banks will have larger profit margins and more reason to lend the excess money on their books from the tax cuts.  However, if they fall into the traps of the past, they may make loans to people whose employment status will shift with the strength of the economy and could lead to default.  Rising interest rates force down the value of existing bonds and the credit markets are seven times the size of the stock markets.  Lower bond prices lead investors to question the quality of their investments and abandon holdings based on a short-term outlook.  Markets are best when people look longer term.

Bond Outflows – Those selling the bonds are taking a capital loss on an investment for which the income was the primary focus.  If you needed a 5% rate of return and the yield on your bond portfolio pays is 5%, should we really put the focus on the previously unquestioned value of the holding if the income still gets paid?  Probably not.  But, for those who already sold their fixed income, there are three choices:

  • Buy newer bond issues – What’s to say rising interest rates won’t make the new bonds lose value in the future
  • Put money in Savings or Money Market – Giving up a 5% yield to get 1% doesn’t make sense.
  • Invest in the stock market – This is a double-edged sword … inflows to the stock market should send prices up with increased demand but, having investors who were spooked by a 4% loss in bonds now taking part in the stock market which could lose 4% in a few hours is not the greatest partnership.

Crypto-Currency … Bitcoin and Ripple could be a fad (Cabbage Patch Kids) or it could be the new way to transfer money.  If I shake the Magic 8Ball of the 80’s, the outlook is unclear.  But, it has created a bunch of wealth and that money will find its way to stock market, in time.  On the other hand, the appeal of the get rich quick bypass of normal investments has taken money out of the market.  So, for now, this is a wash.

Mass Deportation – Politically, if you are fan of the current administration, closing our borders and kicking out people who didn’t use the proper channels in getting here, the recent increase in ICE activity is one of the few promises on which they are making good.  The market likes when a leader does what he/she says he’ll do (even if a good part of its participants find fault with the undertaking).  But, the market not only applauds stable direction it looks six to twelve months out to see that there will be less people buying goods or making use of services.  Less buying units pretty much guarantees lower profit for any business.  Another wash.

 

There are perhaps a dozen topics to be added to these lists.  And, as you can see, the battle for the control of the central nervous system of the stock markets is constant.  Will the combination of factors cause it collapse and convulse or will it just ‘puke and rally?’  River Phoenix left the club to get air or catch his breath; he knew something wasn’t right.  The downward pressure on stocks (and bonds) is from people abandoning their positions and seeking some air to clear their thoughts, catch their collective breath.

The market has been charging up so high so quickly, it had to hit the steam release valve or risk complete annihilation.  It’s the same reason nuclear plants release small amounts of toxic particles into the air with their steam.  If they didn’t, larger, more harmful amounts would explode out into the atmosphere.

Goldman Sachs (don’t get me started on them – maybe another post), at the very beginning of last week, published the warning it was giving to its high dollar clients: A correction is imminent.  They gave it a couple of months to occur.  However, the tail wagged the dog on this one and we are, most likely, in the midst of one right now.

A little vocabulary lesson:

A Market Correction is when there is a fairly rapid decline of 10% (give or take) in prices before resuming normal function.

A Bear Market is a downturn of 20% or more.

There is, unfortunately, no way to know if you’re in one or the other until a 20% loss in value has actually happened.  Note: It’s better, in my opinion, to refer to the S&P 500 as ‘the market’ rather than the Dow Jones Industrial Average.  Basically, 500 companies are a better measure of direction than just 30.

A correction is a positive thing … for the most part.  It clears out the weak investors who shouldn’t have been messing with the stock market anyway.  It provides for a lower purchase price for those who have cash on the sidelines waiting to invest.  However, a Correction + Panic is a bad thing.  We’ve been through some rough markets before.  If people do not learn from recent history and decide to pile on the selling in the next couple of weeks, we may get the Bear Market we’ve been lacking since 2009.  (Note: Bear Markets were coming every 5 to 6 years for a prolonged period.)

If you invest with Full Picture Financial, you have a strategy in place to avoid prolonged exposure to volatile markets and potential extended losses from involvement in a Bear Market.  And, several investors who didn’t have a need to squeeze every bit of return out of the market (and didn’t make recent withdrawals from their portfolios) have held 3 – 10% of the portfolios in cash just waiting for a buying opportunity.  Make no mistake, as of this moment, we believe this decline should be followed by a few more months of prosperity in this market.  However, this prosperity can be abridged by exacerbation of any of the +/- listed above … political resignations / firings / international conflicts / bad corporate stewards, these are all things which could make for deeper, longer lasting declines in the stock and bond markets.  We keep an eye on everything, understanding the Full Picture, so you don’t have to …

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