How will we manage investments if the election results are contested?
First, regarding the election...we respect our clients and friends’ thoughts and opinions on this topic and want to stay in our space of the markets, the economy, and managing your investment money. One of the benefits and purposes of managing investments with a rules-based system is that we know “how” we will make decisions based on “what” information. Therefore, we are not watching politics to make investment decisions per se, but we measure the markets themselves, where we believe that short-term volatility is likely due to the Presidential election regardless of the winner. Simply put, we will watch the over-bought conditions of the NYSE based on the Bullish Percent Index. We believe that volatility due to the election could push stock markets down and this will give us a great signal as to when it is time to reallocate.
How will we manage investments if there is a resurgence in the Coronavirus?
The answer to this question is similar to the first in that our rules-based system gives us the decision-making path to rebalance, moving “risk on or off” as needed. With that said, we believe there will be a 2ndwave of the pandemic. Medical experts have predicted a 2nd wave from the beginning of COVID-19. Therefore, this is not news to the markets. However, how state governments respond to a 2nd wave with more or less restrictive economic shutdowns and how the federal government responds with more or less stimulus money is an unknown that the markets are trying to predict and price. We believe this will be an additional catalyst for volatility, as the markets tend to react negatively to unknowns.
Give an example of a bubble that is not in the stock market.
In the last 400 years there are records of many asset bubbles. Some of them are fun to talk about because they are bizarre. Consider the Dutch Tulip bubble in the 1630s. Investors from aristocrats to merchants to maybe a few workmen piled insane amounts of money into buying flowers. Yes, those tulips…the flower. This was not because of some magical or medicinal qualities, but the “fear of missing out” grew beyond logic. Myths abound as to prices paid but one author points to a receipt showing that some paid the price equivalent of nice house for one bulb while the typical rate was the amount a workman would make in a year, maybe $50,000 in modern comparison! While this is interesting to study, how does it help us? First, we learn that history is full of market speculation and bubbles. And we can study the human reaction to bubbles and then safely expect that human reaction has not changed much today. In more modern asset bubbles, we can see charting that demonstrates the rise, peak, and fall of asset prices in bubbles. In our opinion, this gives us a foundation grounded in data as to what to expect in current and future asset bubbles. But of course, none of us can predict the future!
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