SPDR S&P 500 ETF Trust (AMEX: SPY)
As we are all quite aware from watching the news or reading any kind of blog or newspaper, we are unequivocally experiencing a period of great market volatility. Casual investors, professional traders and even people who don’t have money in the markets can’t ignore what we are experiencing on a global economic level. The sheer impact of macro and micro economic events around the globe are serving as catalysts for market activity on daily and even intraday basis. Never have I had more new and even experienced traders approach me with concerns about the economic environment and the difficulty of finding suitable investments. Do we put our money into equities? Bond funds? Mutual Funds? Commodities? Should we stay in cash until things settle down? All of these are valid questions and depend on many factors and investment goals. One thing is certain however, if you don’t have any exposure to the markets, you won’t capitalize on any gains or opportunities that presented in times like this. But, finding those opportunities can be difficult.
What is creating the volatility?
So, there is no secret we are in a secular bull market. This means that the market is experiencing a long-term bullish trend. This is largely in part due to the Fed’s Quantitative Easing policies that have been put in place since 2009, after the global financial crisis in 2008. The purpose was to artificially inflate, or prop up the economy in order to make sure that inflation did not fall below targets. A downside of being in an artificially inflated economy is that the natural effects of deflation aren’t as influential, and we risk a much bigger than natural drop in the markets once we are done inflating them. Think of it as a tolerance or resistance to a drug you might build up over time. Needing more and more until one day, you have to stop. Naturally, you might expect to experience significant withdrawal symptoms. This isn’t just happening in the United States either. We are seeing similar programs in various stages across the globe. And as you might imagine, a fair portion of U.S. capital and assets are held and leveraged in some of these other economies, not just our own.
What are the events to watch for?
The major events that the Fed tracks to gauge the progress of the economic recovery and impact of it policies are numerous, but all play a role. Some of the key reports and economic indicators tend to be the weekly jobless claims report, existing home sales, consumer confidence, and other data that can be found compiled in the Fed’s “beige book.” In the end, unless you are actively trading the markets, most of these numbers won’t be super relevant for you. What you should be wary of us is the pending interest rate hikes. Just the mere speculation that a date for a raise in the rates will be discussed is enough to drop the markets over 1%. Rate hikes mean that the economy has grown or been inflated to a point where it is strong enough to stand on its own, and that yields can begin to normalize. When this happens, we will see a correction on some level in the markets, and yes, if you have exposure to any kind of equity or long biased investment, you will experience losses for the time it takes the markets to stabilize. Inflation long term is good, and what grows your portfolio. When it is artificial and not organic for too long, it is bad and creates a system of dependency that drives markets, not supply and demand. The goal here is to restore the natural order of things.
“And while the long-term result of a rate increase will be positive for consumers, short term, it’s likely to be costly, said economist Richard Ebeling, the BB&T distinguished professor of ethics and free enterprise leadership at The Citadel in Charleston, South Carolina. “This entire time of quantitative easing has meant they have had access to artificially low interest costs for consumer loans, auto loans, home loans,” he said. “Even a modest increase by the Fed will start nudging up all the related interest rates.” – CNBC
Everything will be impacted, the strength of the dollar, imports and exports, commodity pricing, equities and real estate, car prices and anything else you can think of that is tied to our economy.
What should we do?
Realistically, there isn’t much to do or worry about if you are a long-term investor and not concerned with a short-term drawdown. The natural cycle of the markets simply needed to be kick started after 2008, and they have, and are well on their way to being self-sufficient once again. It is hard to know what will happen exactly, and when. But, if you find yourself concerned with a short term drawdown that many are anticipating, consider talking with your trusted financial professional about adjusting your investments and risk profile to better position yourself for defense in a time where caution is advised. Personally, I can’t wait for the economy to get back on its own feet, and not be subject to the numbers in weekly data reports. I want a market that doesn’t need artificial infusions from the government. The government has played with fire for far too long with our economic future.
What are your thoughts? Where is the market headed?