Calm above, turmoil below for a month to remember

By John Grace

Contributing Columnist

The 1920s began after World War I with the last American troops coming home from Europe. It was a decade of change when American citizens began owning radios, telephones and cars, which created a requirement for good roads. 

Rural farmers began to leave their farms for regular paycheck opportunities in the textiles, tobacco and furniture industries. It was a time when women shortened, or ‘bobbed,” their hair and men shaved off their beards. The decade began with a roar and ended with a crash.

Could it be déjà vu all over again? Let’s begin with the understanding that it’s not about a prediction. It’s all about the preparation. 

Our longstanding goal is to support investors in preparing for the good, the bad and the unforeseen. The stock market this year has been as quiet as a library, which is disconcerting. 

The index hasn’t seen a 5% correction based on closing prices since the end of October 2020, says the Wall Street Journal. Writer James Mackintosh goes on to say, “The last time the S&P 500 was this serene for so long was in 2017, a period of calm that ended with the volatility crash early in 2018, although back then it was quieter for much longer.”

Dent Research reminds us that the S&P 500 was off 20% in 2018, followed in 2020 with a loss of 35%. The current expectation is for the third loss to be more severe than the first two. It might be something like a 47%-50%, per Dent Research. With stocks up 100% as of Aug. 17, 2021 since the last dramatic selloff, according to CNN, some worry about the continued success of stocks. 

Right now the market seems to be driven by FOMO, or fear of missing out, and TINA, there is no alternative to stocks. With interest rates so low, the risk of owning stocks seem to offer the best hope of gains. 

In the past, investors would have moved from stocks to bonds or vice versa. Today they just switch from one sort of stock to another, so falls in one may be offset by gains in another. Everybody loves the melt up. It’s a wonder as to how many investors are prepared for a melt down.

This observer is among those who hold theory that stocks keep melting up thanks to a massive bubble that is being inflated by very inexpensive money and government stimulus. 

“Stocks haven’t been so expensive since 2000, while a bubble mentality is obvious in the wild overtrading of fashionable stocks,” according to the Wall Street Journal. “It is undeniable that stocks are far more expensive than usual. But bubbles usually involve lots of volatility as they inflate, not a cam exterior and turmoil within, because every little price drop is magnified by others fearful that the bubble is about to pop.” 

This time around, the primary threat to stocks may be the Federal Reserve, as opposed to the market’s overvaluation. Now central banks around the world have convinced people they have all of the tools in their tool boxes so that the machines will do the work of heating and cooling the economies so everyone stays comfortable, spending like there’s no tomorrow. Don’t we wish it was that simple.

Take off your rose-colored glasses, the ones that discolor everything, and give some thought as to how the market might react if the Fed began a normal rate hiking cycle, making cash attractive again. 

Such action could bring the turmoil below to the surface, which won’t be pretty. Now is the time for savvy investors to put your exit strategies in place to potentially keep your assets from being handed to you.

Right now the market seems to be driven by FOMO, or fear of missing out, and TINA, there is no alternative to stocks.

John L. Grace is president of Investor’s Advantage Corp, a Los Angeles-area financial planning firm that has been helping investors manage wealth and prepare for a more prosperous future since 1979. His On the Money column runs monthly in The Wave.