September 24, 2022

Steps & Stages

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The Stock Market Panic Is Here

Can you feel it? “Risk investing” just lost its glamour. Coming onstage is “safety first,” and it is a powerful desire. It flips investors’ wants upside-down, making risk-reduction (i.e., selling) the desirable action.

(For more, see my April 30 article, “Stock Market Investors Ready To Panic Next Week.”)

Why now?

Because the last hope just fizzled. Yesterday (Wednesday, May 4), Federal Reserve Chair Jerome Powell’s statements confirmed that the Fed was powerless to fix what’s broken, much less bring back the bullish days of 2021. And that means Pandora’s box has opened…

… releasing hyper-negative media articles. By this weekend, there will be a flood, initiating an emotional shift. As in the past, they will produce feelings of fright and remorse among the multitude with fully-invested investors. The self-sustaining selling cycle will follow.

Why panic?

Because negative developments are everywhere, and they are the last thing standing in the dismal bond and stock markets. The rationalization, “but the economy is still doing well,” is based on past data. But Wall Street focuses three to six months out, and those outlooks are filled with recession worry.

Importantly, that means analysts are reviewing and revising growth forecasts down. Optimism fades when risk-reality takes on a greater role. Expect more downward adjustments to come.

Bond investors have another negative issue: Bond vigilantes. These Wall Street professionals have had enough of the overly-low “real” (inflation-adjusted) rates. As a result, intermediate- and long-term yields are rising at a fast clip (causing prices to fall). This graph shows those rate climbs, including even the one-year maturities.

(For more, see my article, “The Bond Market Vigilantes Are Back, Overriding The Federal Reserve ‘Go Slow’ Policy.”)

The bottom line: Where to invest?

Start with the one place where there is true safety: Cash reserves, including U.S. Treasury Bills, FDIC-insured bank deposits and high-quality money market funds. Although the yields are well below the inflation rate because of the Federal Reserve’s actions, they protect investors’ capital.

Next, examine “sound” income investments with an understandable, limited risk. For example, shorter-term to intermediate-term, high-quality bonds and bond funds.

Lastly, for the future, think about what characteristics make for desirable, long-term investments for income and/or growth potential. This thought process replaces the 2021-22 strategies with plans for what would be advantageous when this bear market ends.

Until then, focusing on cash reserves seems the wise choice. Think of this as a rest stop strategy to avoid the mad dash traffic.

https://www.forbes.com/sites/johntobey/2022/05/05/the-stock-market-panic-is-here/