Will the Next Market Monster Please Stand Up…?

Tis the end of Q1 already.

T’was a fast quarter indeed.

And investor fear has wasted no time ramping up again.

This process seems very unlikely to change anytime in the near future, and in fact the odds are (well, mine anyway) that the swathe of items, new and old, to be afraid of are positioned for yet another climb up the wall of worry.

My view would be to try and not fall for the mind-games ahead, particularly with US elections just around the corner (I’ve already ordered a new case of fruit-flavoured TUMS).

Us versus ‘They’

‘They’ say that, in a four-year term, politicians are really only actually doing their "jobs" for roughly two of those years.

The operative word here being “roughly.”

In year one they set the stage for their agenda. Year two is about arguing for their position at mid-terms. In year three they respond to the results of the mid-terms. And year four, well, they have to run for re-election.

And in amongst all this electioneering and political engineering the media machine pushes people to take sides and waste their lives conjuring things to be angry about, rather than seeing all the good stuff that’s going on.

We all get the choice of how we play that game. Let's make the right one for you and yours. 

What’s clear, and been repeatedly stated here, is that trying to find some sort of political "side" in your investment and wealth building plan is a wasted effort.

Markets Are the EKG of Emotions...

And so it goes with markets. 

Investing is a long and winding road (wow, that's from the Beatles - and man, am I aging myself today or what?) - and it does not end until you meet your goals.

Remember, the only "index" you need to fret over is to build your plan, stick to your plan, be patient with your plan, meet the wishes and goals of you and your family.

That’s how you get the job well done.

What you are told to worry about today in the press and media coverage rolling in like large waves in the ocean will most assuredly change with the wind.

Those concerns will come and go, only to be replaced by larger things to fear in the future. 

Haven't you noticed that Brexit – an issue slowly dying on the vine - barely makes anyone pause anymore? 

Yet when it was announced investors could not stop paying attention and the setbacks and nightmares caused at the time were very unsettling for many.

We call it "Shiny Object Syndrome." 

That’s because things for us to fear all start as shiny objects - easily getting your attention - until they fade in comparison to a new, shinier object coming next.

Rest assured whatever it is we’re supposed to be afraid of today will end. And it will be replaced by other topics, other things, other so-called Black Swans.

The Pause Button

Now, if you think the last month has been somewhat choppy that’s because it was.

The Dow Jones has spent most of the last month in about a 600-point trading range, slowly trekking back and forth over the same points, and allowing the media to define (read: make up out of thin air) new things to be concerned about as it does.

Likewise, check the S&P 500. It too has been in a fairly tight range given the movement witnessed in Q4 of last year:

With the exception of a couple of days of days earlier in the month, most of the "activity" has been limited to about a 2% range.

The range was just slightly wider for the Dow Jones and even a tiny bit wider still for the Nasdaq.

Not too shabby, really. But man, the fear was palpable:

Now, some folks call this chart above the 10-year Bond market.

But we have another name for it: We call it the "fear trade."

And it has a twin sister called “the gold market” which always becomes something of a "must have" when fear rises. 

The fallacies in this thinking cover a long list of sins.

Yet the market action shadows what we’ve covered for some time now; that the fears of 2008-2009 will be with us for decades.

Which, for long-term investors, is a very good thing.

So, let me tell you what happens when bonds do what they’re doing:

1. a) First, investors gasp, and often sell their ugly 16 P/E stocks,
2. b) Then they assume something bad is happening because rates are plummeting. So, they rush to buy "safe" bonds at a circa 41.49 P/E…guaranteed for the next decade,
3. c) Next, as that mini-panic roils the world, corporations use the fear to refinance debts for longer periods of time and at often at much lower rates.

And the result?

Well, there are a few worth noting:

• The earnings of those companies - taking advantage of that fear - tend to rise, with significant savings on debt costs.
• This tends to cause the P/E to fall.
• And as the wave of the mini-panic recedes back into the vast ocean of more waves ahead - those cheaper stocks tend to have buyers come in. And then markets “rise from the dead."
• The coup de grâce once the market finds its balance is a circa 35 basis point fall in bonds that tends to be somewhat erased, locking in sub-par performance for the holder for 10 years to come.

Why? 

Well, because for the last 35 years bonds have gone from 17% yields down to sub-2%. 

That has created a stellar record of return.

But there’s one tiny flaw: It cannot be repeated at current rate levels…like ever.