We Didn’t Start the Fire, Redux
By: James C. Denton, CFP®, Managing Partner
March 1, 2022
You are used to hearing from me at the beginning of each quarter, providing my recap of what has happened and, to some degree, my prognostications of what is likely to come next. I had a lot going on in my personal life at the end of last year and wasn’t able to find the time or the motivation to “elucidate” on what was a fairly unexciting market at the time. Aaron picked up the slack for me and put out a letter of his own, which was very well received. And also very timely, as it turns out.
We didn’t start this fire. We, the United States, we the civilized world, we the investing public, or we the clients of DFS Advisors. And certainly not we, the principals of DFS. But a fire we have. So what to make of it?
Let’s back up a bit. As I alluded to above, the market was in something of a quiet period towards the end of last year. The third and fourth quarters had a minor increase in volatility, but overall moved more sideways than down. Going back farther, of course, we have seen what can only be described as staggering gains over the past three or four, even 10 years, especially considering the consistency of the returns, and the very impressive recoveries when the market did act out.
All of this combined (at least should have) yielded an expectation of a correction in the first (current) quarter. After all, we hadn’t had one in a while. Add to this, a change in direction by the Federal Reserve from a historically unprecedented stimulative policy to a “tightening” cycle as the stimulus is no longer either required or appropriate, and inflation began to rear its’ ugly head. These factors alone would have shaken the market up a bit as it adjusts to the new reality … i.e., investing on the basis of market and economic performance, rather than as the result of huge amounts of cash in the hands of the investing public with not much else to do with it.[1]
But then Vladimir Putin started a fire. This came as something of a surprise (yes it unfolded slowly, but it wasn’t on the list of market expectations and fears at the end of last year) and surprises are anathema to market performance. Virtually all market volatility – at least the scary kind – comes as a result of unexpected occurrences with potential for significant market impact. So the current market uncertainty and resulting volatility is completely unsurprising as it unfolds.
What is surprising is the tempered nature of the unsettlement in the markets. We baby boomers (myself and my contemporaries) have long been seen as the prime movers in the investment markets. We are no longer the largest generation, but we still have our share of the money, and therefore a significant impact on investment directions. We are old enough to remember when THE RUSSIANS! were stars in everyone’s nightmares. And THE RUSSIANS! just invaded the Ukraine. Unprovoked, without any rational justification, they crossed a western border, my greatest fear since hiding under my desk in the second grade. (A line from another Billy Joel hit, “Leningrad” … “Cold war kids were hard to kill, under their desks in an air-raid drill”). And this after we thought the Bear had been rendered tame and friendly.
What this says to me is that the current market still has substantial underlying support in investor confidence. Any informed market observer anticipating all of these circumstances occurring simultaneously would have predicted a much more pronounced reaction from investors. But when we look at what has actually happened, it’s much more contained than most would have expected. Down-side moves, while frightening to many of us, are nonetheless contained, and recoveries have been quick and impressive.
Bottom line … another buying opportunity. As with all such occurrences, had we seen it coming we would have sold out in December sometime, and would be buying today. But of course if we (the market) had anticipated it, it would have all unfolded much less dramatically, and the opportunities would not have been there. When the market has all relevant information it is able to digest, discern, and evaluate, and respond in a rational, disciplined way. When it is surprised, it responds in an undisciplined manner, often yielding unsustainable positive gains when the news is good, and undeserved punishment when the news is “sub-optimal”.
So, another old song (Aaron, what did you start?) “Mama said there’d be days like this” … So, yes you guessed it. My advice is to stick to your plan. Your plan is diversified, disciplined, rational, designed recognizing what Mama told us; there will be sub-optimal days, we will not be able to see them coming, so invest in a way to take advantage of the good days, while not getting too badly hurt when the “days like this” come. And as usual, if you want to peruse what you have and why we are keeping it, just give Aaron or me a call, we will be happy to discuss it with you.
[1] I’m not going to elaborate here, but I recognize this statement may require some unpacking for some readers, so if you want further discussion, just give me a call.
The views expressed in this article are those of the author and may not reflect the views of LPL Financial. This material is for informational purposes only and should not be considered as investment advice for any individual. You should consult with your personal advisor before making any decisions based on this material. Past performance does not guarantee future results. The economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.