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What to do During Market Volatility

As you probably know, volatility has returned to the markets recently.  To explain why, I want you to imagine you’re playing a game of chess. 

Visualize this: You’re fifteen moves in, and all your pieces seem to be on good squares.  You’ve captured one of your opponent’s pawns.  Everything is going great so far, and if a computer analyzed your position, it would undoubtedly say that you’re winning.  But suddenly, it’s your move again…and you can’t figure out what to do next.    

None of your possible moves seem like they’ll do you any good.  In fact, a lot of them seem like they will make the situation worse.  You stroke your chin and grit your teeth and rack your brain as hard as you can, but you just can’t seem to figure out where to go from here.  And suddenly, you start seeing threats everywhere.  “What if my opponent does this?” you think.  “Or that?”  Everything feels like it could fall apart in an instant.  But the clock is ticking, and you have to do something, so you choose your fallback option.  You guess which move to make…and hope!  

Doesn’t sound like the best approach, does it?  

So, why am I describing a hypothetical chess game?  Because it accurately describes what many investors are doing right now.  Which means it’s time for us to review what we should do!  

A Winning Position

Up to this point in the year, the markets have put most investors in a winning position.  The Dow, S&P 500, and NASDAQ all hit record-highs, and then kept climbing.  It was only about two months ago that the Dow hit 35,000 for the first time.1  Driven by the economic recovery – and the fact that historically low interest rates make stocks one of the few places investors can earn the kind of returns they need – the stock markets have helped most investors to a lot of wins this year.  

But when stock prices rise this high, there comes a point where investors start wondering where things can go from here.  They start looking for what could possibly drive the markets higher.  If they don’t find anything, they wonder if maybe prices aren’t a little too high given the economic uncertainties we’re facing.  It’s time like these, when the markets have been on a tear but the threat of a downturn looms, that investors become like our hypothetical chess player – in a winning position, but with no clear idea of what to do or where to go next.  And suddenly, all those economic uncertainties start looking really ominous.  

That’s why, over the last few weeks, the markets have wobbled back and forth as investors start asking the same question over and over: “When?”  As in, when will this incredible run in the stock market end?  When will the next correction be?  When should we make a move?      

So, for the rest of this letter, let’s look at the questions.  We’ll start by looking at some of those “uncertainties” I mentioned.  Then, we’ll discuss our possible moves – and why one move is clearly the superior choice. 

Economic Uncertainties

At the top of the list is the Delta variant, with some fearing that rising cases may derail the economic recovery or lead to another period of lockdowns.  Those fears led to a big dip in consumer confidence in August.  That’s important, because consumer confidence can serve as a gauge for how much Americans are planning to spend or invest in the coming months.2    

Next on the list is inflation.  Anyone who has gone to the grocery store or filled up at a gas station this year knows consumer prices have gone up, sometimes dramatically.  That’s because, with our economy reopening but supply chains still a mess, demand for consumer goods is far outpacing supply.  As we know from the Law of Supply and Demand, when demand is greater than supply, the price increases.  When prices rise across the board, we call it inflation.  Inflation, in turn, makes it harder for people to buy the goods and services they need.  It also makes it harder for businesses to hire new workers, invest in new technologies, or expand to new markets.  The result is an economic slowdown at a time our country can least afford it.  

The worry here is that the Delta variant will do the same thing the original virus did last year: interrupt global supply lines.  That’s already happening, and if it worsens, it could cut supply even more.  This is called stagflation – an increase in inflation combined with a decrease in economic activity.  To be clear, we’re a way off from that, but it’s something to keep an eye on.    

To combat inflation, the Federal Reserve always has the option to raise interest rates.  But that’s another question mark investors are wrestling with.  Historically low interest rates have been an important fuel source for the stock market.  Take that fuel away, and market growth could stall. 

A third uncertainty is contagion.  But here, we’re not talking about a virus like COVID.  (Or at least, not directly.)  This type of contagion is when economic or financial problems in other parts of the world spread to our shores.  For example, take what happened on Monday, September 20.  At one point, the Dow dropped over 800 points, largely on news about a single company called Evergrande.3  

Evergrande is a major Chinese property developer with literally $300 billion in debt.4  For years, the company has borrowed aggressively to build (and sell) more and more homes and apartments.  It’s all part of a much larger bubble in Chinese property that now threatens to burst.  Evergrande has proven unable to pay their debts, and now concerns are mounting that the government will allow the company to fail.  That could mean huge losses for all of Evergrande’s shareholders, bondholders, and business partners…who are based all around the world.  As you know, the global economy is a huge, interconnected web.  Pull on one thread, and others might come undone, too.  That is contagion, and with the global economy still coming to grips with COVID, now would be the worst possible time to experience it.  

We’re already dealing with a physical virus.  We don’t need a financial one on top of it!  

The fourth and final uncertainty is simple.  Right now, investors have a lot of canaries in the coal mine to keep an eye on.  It’s easy to think of reasons the markets might decline.  But finding reasons the markets could climb isn’t as easy.  When stocks began their huge rally last year, it was because we had so many things to look forward to.  Vaccines.  The reopening of our economy.  Jobs returning.  The resumption of eating in restaurants and going on vacations and all the other activities that serve as the building blocks of our economy.  

Now, in September of 2021, we have those things.  They’ve driven the markets to this point, but future growth is predicated on future expectations.  Right now, we’re simply not sure of what to expect.  There aren’t many obvious positives to look forward to.  That’s why the markets have been in this wobbly holding pattern.  That’s why analysts and economists have wondered if we’re due for a market correction.  And it’s why investors are like the chess player, desperately trying to find that invisible move.  

Finding the Right Move

So, what is the right move?  

In chess, players have to rely on their own wits – while often battling their own emotions – to find the right move.  But as investors who rely on technical analysis, we have an advantage over chess players.  We don’t need to ever guess at moves, and we can take emotion out of investing altogether, because we use data and rules to determine which moves we make.  We also don’t need to just sit, frozen at the chess board because we’re too scared to do anything.  

We know from history that there are two times when investors must be disciplined: When the markets are up, and when the markets are down.  (In other words, always.)  The best way to deal with uncertainty is to not overreact to it and move blindly.  Instead, we’ll remain disciplined and obey the rules that govern our investment strategy – the same rules that tell us when it’s time to go on offense, and when it’s time to play defense.  If our technical signals indicate it’s time to make a move, then we’ll do so…but never simply because the uncertainties are piling up, or because there are more negative headlines than positive.  When investors do that, they are like the chess player who guesses and hopes.  

We want to be like the chess player who wins.  

In the meantime, my advice is to enjoy the changing colors of autumn!  We will keep monitoring everything on your behalf.  As always, thank you for your continued trust in us.  And remember, if you ever have any questions or concerns, please let me know.  We will always be here for you!  

 

1 “Dow hits 35,000 for the first time as stocks continue to shine,” CNBC, July 14, 2021.  https://www.cbsnews.com/news/dow-jones-today-35000-first-time/

2 “Consumer sentiment suddenly crashes below early-pandemic levels,” CNN Business, August 18, 2021.  https://www.cnn.com/2021/08/13/economy/consumer-sentiment-august/index.html

3 “Stock Market Pares Losses, but Dow, S&P 500 Dow Fall Nearly 2%,” The Wall Street Journal, September 20, 2021.  https://www.wsj.com/articles/stock-futures-european-and-asian-indexes-fall-sharply-11632123909?mod=hp_lead_pos1

4 “Stocks tumble as Wall Street’s fears turn to China,” CNN Business, September 20, 2021.  https://www.cnn.com/2021/09/20/investing/dow-stock-market-evergrande-today/index.html


Securities offered through Cambridge Investment Research, Inc., a broker-dealer, Member  FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors, Inc., a  Registered Investment Advisor. Cambridge, Clear Vista Financial and FCCU are not affiliated.  Non-deposit investment products are not NCUA insured, not credit union guaranteed and may lose value.

This material was prepared by Bill Good Marketing. Specific companies are mentioned for illustrative purposes only. This should not be construed as a recommendation to buy or sell securities.