“The stock market can remain irrational longer than you can remain solvent.”
~ Economist, John Maynard Keynes”
The age old investing principles of don’t speculate. Only invest in things you understand. Don’t chase yield. Average into markets. Be patient, don’t expect to get rich quickly. Only invest in assets where you can determine intrinsic value.
One might argue, that none of these investment principals have worked over the course of the last year. In fact, it has not been a great decade for investors following these principals.
This cycle by many measures has defied expectations. Just take the market activity we’ve seen in these so-called ‘meme stocks’ earlier this year. The madness has not been confined to the stock markets, take for example housing or precious works of art, many would argue that these are out of touch with reality. This investing environment has confounded those trying to make sense of it.
So what is an investor to make of it all? Investors fundamentally want to protect their savings from a crash, but they also want to protect them from the guaranteed loss of purchasing power involved in staying out of the stock market at a time when interest rates are lower than inflation.
It is notoriously hard to invest during a bubble – even if you diagnose one correctly, the opportunity cost of waiting for the bubble to burst can be unendurable. With markets consistently making new highs, it is difficult to be bullish.
A long list of narratives have been put forward to explain how markets have risen to such extremes. These narratives include low interest rates; the pandemic accelerating the rate of change or forced adoption of new technologies that in turn spur productivity and growth in earnings and the increased participation of retail investors to name but a few.
To my mind, the current debate in markets around inflation and interest rates is essentially the only debate that matters. A rise in interest rates and/or inflation beyond what the market expects could be damaging for asset classes where valuations are based on interest or inflation rates remaining low.
This is not a time to try to be too clever. Plan for the best, prepare for the worst. The fundamentals of investing are relevant, they always have and always will. They often only become clear after the fact.
Call me with questions.
-Paul
Noteworthy links:
Social Security Increases Benefits by 5.9% for 2022
Reconciliation Bill Evolves; Tax Rate Increases Less Likely
Big Questions - Chief Economist Scott Brown discusses current economic conditions
Trading vs. Investing... Growing vs. Protecting
Doug Drabik discusses fixed income market conditions and offers insight for bond investors.
Trading and investing (as it pertains to bonds held in your investment portfolio) may seemingly be equivalent but they are inherently quite different. Trading is tactical and results often rely on dynamic timing, accurate forecasting and economic data attentiveness. Expected possible consequences to more volatile trading are potentially greater gains but also greater losses. Investing is much less active, often strategically long-term and significantly more predictable. Fixed income disciplinary disciples often utilize bonds as investments, not trading vehicles.
There are numerous “distractions” amplified by drama-driven media outlets that can be disruptive forces when investing. It may be inefficient to underestimate the power of fear and emotion on economic conditions. Take for example the 2020 pandemic. Is your garage or basement chockfull of toilet paper, hand sanitizer or paper towels? The fear of running out initiated a hoarding of goods. The hoarding of goods contributed to the shortage itself. Some folks had plenty of supply while others had none.
Now think of the current supply chain issue. When a corporation or factory relies on a particular material for production of their product, fear of a shortage or logistic problems amplify the supply deficiency when they amass greater than needed materials. Some stores over-stock while others are left slighted and disadvantaged.
The Federal debt-ceiling is another current distraction. Although the Senate approved legislation late last week to raise the debt ceiling, it is a short-term fix that kicks the can down the road for two months before it resurfaces again. This self-imposed legislative rule was created by Congress, and can be eliminated by Congress or amended at any time by congress. The notion that Congress would ever let our U.S. debt default over an arguably political-based rule used more for political grandstanding than as a useful economic tool, is absurd. Yet, this distraction periodically induces market movement.
The common denominator is that momentary distractions may affect trading decisions but rarely should alter fixed income investing. Successful trading relies on timing the market in anticipation that opportune appreciation contributes to income generation. Investing is not about timing the market, but about time in the market. Distractions escalate and diminish recurrently, yet strategic long-term individual bonds perform their task of principal protection irrespective of the commotion or momentary distractions.
Here is a link to the full article: Trading vs. Investing... Growing vs. Protecting
To learn more about the risks and rewards of investing in fixed income, please access the Securities Industry and Financial Markets Association’s “Learn More” section of investinginbonds.com, FINRA’s “Smart Bond Investing” section of finra.org, and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) “Education Center” section of emma.msrb.org.
The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.
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