The Boy Scout motto resonates during periods of market volatility like we’ve experienced the past few days. My real-time news notifications have been blowing up with alarming alerts about the largest declines in the stock market in years. More interest rate hikes by the Fed, fears of higher inflation and higher long-term interest rates seem to be driving at least part of the sell-off.
It doesn’t really matter what the cause for the sell-off is right now. It’s likely not the end of the world and the stock market probably isn’t going to zero, let alone getting cut in half. Stocks go up and stocks go down. We had a stratospheric start to 2018 and now the market is coming back down to earth. I can’t say I’m surprised but I certainly didn’t predict this would happen when it did. It’s nigh impossible to predict the timing of such events.
That’s where the inner boy scout (or girl scout) in all of us needs to be alive and ready. If we are prepared, we really shouldn’t fear.
A few thoughts worth considering at this juncture:
- Investor optimism was awfully high coming into 2018 and had remained so through the end of January.
- Expectations are pretty high too right now. I don’t know if it’s my pragmatic side or the cynic within me but I tend to heavily discount high expectations.
- In re-reading the Hoisington Quarterly Review and Outlook last night, I was reminded of a few things:
- Consumer spending is fairly stretched based on income growth and the savings rate. Since the consumer is the largest driver of our economy it stands to reason there may be a few bumps along the road to current GDP growth expectations.
- Deficit financed tax cuts aren’t likely going to unleash a wave of economic growth, especially with our nation’s current leverage levels.
- The current monetary policy posture isn’t likely very favorable for economic growth or stock returns, especially if the Fed goes too far in the tightening direction.
There is no certain path forward from here. The market may continue to slide or may pause and start its ascent again. I have no idea. However, there are always two sides to every narrative and to every trade. When a narrative or trade becomes too one-sided, it’s ripe for correction or reversion to the mean. Being prepared with a plan and having the discipline to stick to the plan is the most important thing you can do.