You are on a nice cushy cruise and suddenly the ship sinks. Most of the passengers manage to get into lifeboats but not all. You are sitting in your raft and the sea is calm, unaware of the sharks swimming below you. You think a rescue will come soon so why worry? Well, those sharks are hungry.
So what does this analogy have to do with your money? I will explain.
The cruise ship is the stock market (volatility). U.S. markets have been on steroids since March 2020. Some companies are weighted down with debt and high valuations, they have been for some time. It was a really nice cruise but you are now in a raft (your portfolio) and the sharks represent current risk. Ignoring risks are like ignoring sharks. You do so at your own peril, so it is best not to be complacent about either.
To continue our analogy, the passengers that did not make it into a raft leave blood in the water. The blood signifies underlying market conditions. Many S&P and Nasdaq stocks are below their 200-day moving averages and nothing good happens when only a few big tech names are keeping your raft afloat.
Now let’s talk about that rescue: If you are hoping the Federal Reserve will swoop in to save you, keep in mind that they have very few ways to facilitate one. They need to raise rates and reverse QE to deal with inflation and if the economy slows it could be treacherous if your raft is made out of flimsy material (high valuation, high debt companies or bonds) so what about Treasury?
Sure they could roll out another round of stimulus, especially when gas goes to $7 a gallon and no one can afford food but this only postpones your rescue. The president could release oil from the strategic oil reserves but that leaves a slick around your raft and still no one is coming to save you. This leaves private enterprise to efficiently come to the rescue, but they are going to charge you for the convenience, so you need to decide who to pay and how much.
There are now lots of sharks below your raft but you can't really see them since it's still a sunny day. Out in the distance you see storm clouds so you best decide to make that rescue call. If you call “Nasdaq” rescue they will arrive quickest but it could cost you almost everything in your raft since only a few rock star captains are showing big profits. They might send out the entire QQQ team so you get the bad with the good. There are some bad NASDAQ crew members that are not profitable so you best be selective if you choose this crew.
So, what about S&P rescue? They are usually safe and pretty reliable right? Well, S&P rescue has some debt but a lot of good crew members. Those with debt may struggle with higher rates. Still, selecting a good crew with S&P might just get you rescued, especially since the dollar is their captain. So, who does that leave you with? Emerging Markets rescue? Well, they are the cheapest and you can't always rely on them but when they come thru you get saved and keep a lot of the money in your raft but it's a gamble. Then there is the new kid on the block "Crypto" rescue, but they don't have a proven track record yet, especially on rescues. They are an interesting newcomer but is now the best time to call them?
The clouds come in you can see the outlines of the sharks closest to the surface. The first shark you see is inflation.
This shark "could" be transitory if everyone spends all their leftover stimmy money on stuff they can't get due to supply chain issues but this is looking less likely now that there is a new shark approaching.
Until excess liquidity and supply chains are resolved, inflation is a sure thing and no one really thinks once prices go up they will ever go back down again.
Now your raft is taking on some water and the sea is darkening. Geopolitical risk is the new shark thanks to Russia’s invasion of Ukraine. Not seeing this shark in advance was a mistake, but what can you do about him? He supplies energy and natural resources to much of the ocean and he is not just hungry, he is mad.
So it looks like you are now in survival mode, but you are not really prepared for survival mode. You go into your memory banks and think, "when was the last time I was in such a pickle?"
Oh wait, the 2008 financial crisis!
Now you remember that many of the rafts went down, there was lots of blood in the water and it was really scary but those who had the nerve to buy stock when waters were reddest not only got rescued, they increased the money stashed in their rafts. Do I think it is 2008 all over again? Not really.
So, I can't tell you for sure if or when the ship goes down or if the passengers get rescued, but you need to ensure you have the best chance of survival.
Reassess risk in your portfolio to hedge against rising interest rates, inflation and wars. The sea is starting to churn, so it's best not to wait too long to make that call.
