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Hurricane Hermine: What It Can Teach Us About How the Market Works

Posted by kdadmin on September 2nd, 2016.

Hurricane Hermine: What It Can Teach Us About How the Market Works
 

Imagine “sleeping” in the center of the 100 mile lighting zone towards the bottom of the screen. That was me. As Hurricane Hermine made landfall last night, with the eye roughly 100 miles north of me, I was very grateful to have my marine storm tracking app and data feeds.

While on Monday, my meteorological education told me that the hurricane would likely miss me, it was still crazy to be in the tropical storm’s path.

Kind of like it would be crazy to be in the stock market’s path right now …

Hurricane Hermine

Storm tracking is very similar to market tracking. You have this HUGE thing that will do whatever the hell it wants and nobody can really stop it. Everybody simply has to deal with it, making whichever best preparations they choose. (In 2012, I chose to evacuate the Outer Banks of North Carolina just four days before Hurricane Sandy struck.)

As usual, an ounce of prevention is worth a pound of cure. For example, two days ago, I put my beloved Mini Cooper S in storage on higher ground and rented a truck. I identified inland shelters. When I thought high tide could cause a problem with storm sewers, and subsequent flooding, I booked an inland hotel on higher ground.

Even with all of these preparations, when I came back to my house on Thursday morning, it was impossible to drive through the nearly 18 inches of water on the street’s low spots. Luckily, my house is on 12 foot stilts, but I still had to drive / walk there somehow. Let’s just say that for a native Minnesotan, it was a surreal experience.

What It Can Teach Us About How the Market Works

If we look at the current stock market, we have all the makings of a great storm. If you’re willing to read the signs. In fact, just today the jobs numbers came out and were “very disappointing.” But, the stock, bond, and gold markets all went up.

Just like tracking a storm, at various points, certain decisions must be made, and it’s far better to make those decisions when it’s still sunny outside than when you’re dancing around a couple of feet of water in the road way, in the pouring rain.

Or, make that sheets of rain outside my doorstep …

 

Take our current stock market. For all its drama, in August, it essentially went nowhere. Barely besting a stable bond. Ever since its high on May 23, 2015, it has barely bested a much more docile bond fund (5.92% (SPY) vs 5.38% (AGG)).

In fact, all the things that would tend to make the stock market grow are falling. Corporate earnings are down tremendously. GDP is up at an anemic rate of 1.62%. Federal QE has ended. Interest rates are rising. Manufacturing demand is down. Inflation is less than 1%.

It’s like the news in Florida on Monday. Winds were rising, Hurricane Hermine was gathering strength and becoming better organized in the central gulf, atmospheric issues could push it further north, or right into the Tampa Bay area, winds could reach 70+ mph with a storm surge anywhere from 3-10 feet.

It Boggles the Mind

What boggles my mind, really, is that while most sane people would do whatever was necessary to be ready to evacuate a hurricane, many are just blithely ignoring the current negative market indicators. It’s like 1999 and 2007 all over again. It’s like somehow they think the storm won’t hit them. But, narcissism has heavy financial consequences.

If you remember those days, it was the first time when “roboadvisors” were all the rage (1999, 2007). They were times of “anybody” could make money in the market. Or, the “you can’t lose” hysteria. Or the “earnings don’t matter anymore” idiocy. It was a time when the new investing generation figured they were smarter than everybody else who had been doing this for decades. So, like so many of the generations before them, they bet heavy and they bet hard. And, as a reward for their egocentric belligerence, most of them lost more than half their money.

But Can WeLearn?

Lately, I’ve had several people accuse me of being “a conservative rule follower.” I pretty much wanted to strangled them on the spot, then and there.

But what these people don’t know is that I’m planning far, Far, FAR down the road. That’s VERY difficult. I don’t want to have all of my plans thwarted, now, because of something stupid. Something as stupid as investing in stocks at the height of the highest stock market in history, when all of the sources of its fuel (QE, low interest rates, high unemployment) are gone.

The question, really, is can we learn from our past performance? Can we learn to read the signs, to know when it’s time to bail on stocks (long ago), when it’s time to crawl into the life raft of certain bonds (long ago), and when it’s time to temporarily evacuate to cash (last summer)?

If you’re my client, your portfolio has learned, even if you haven’t. Even if you want to go become a speculative real estate investor at the near top of the market, right at the beginning of rising interest rates (shrinking the number of buyers) and a plateauing stock market (real estate usually follows the domestic stock market on a couple yearlag). Even then, you can rest assured that your portfolio has tapped out of the hysteria, made the requisite emergency preparations, and either hunkered down or evacuated.

TheBottom Line: Learn

If you’ve been reading my blog, you know that for the last several months, I’ve talked about the sheer lunacy of investing in the stock market. Kind of like these two idiots who were surfing in wicked rip tides and a raging ocean over half a dozen feet higher than normal.

I guess the bottom line is: LEARN. I write these articles to educate you. To give you some idea about what is coming and why. I do this in the hope that you’ll be able to read the signs to enough of a degree that you can feel comfortable in what is happening in the economic world, and in how I’m managing your money, or could be …

The Next Steps?

Learn about bonds. Start here.

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