At last, the election is finally over and to the relief of the financial markets we can move on. Whether you liked the outcome or not, stock prices bolted to the upside on the election news, and we were off to the races once again. Bond prices dropped because markets think Trump 2.0 is going to overheat the economy and cause more inflation. Then there are tariffs and the Federal debt and on and on. Lots of worries but in the meantime, investors are experiencing FOMO (fear of missing out) and buying stocks and crypto like there’s no tomorrow.
But that’s where the problem lies; there is a tomorrow. Right now, before we get too excited about the financial fallout of election outcomes, we need to acknowledge the same economic issues nonetheless remain. For the time being we are enjoying a benign environment. Low unemployment, inflation back down to below 3%, potential rising productivity from AI application, booming stock prices etc. Sure, the cost of living has gone up 25% in the last 4 years but maybe that’s rather backward looking. Household incomes and net worth are up a lot too since 2020, but no one wants to count that.
Stocks have been great this year. Bonds not so much. Junk bonds are expensive. Junk investors are accepting very low “spreads” the difference between Treasury bond rates and junk interest rates is very low. What does this mean? It means risk. Risk appetite in low grade debt is often a good measurement for investor complacency. There is growing risk in stocks too, especially the best performing names like Nvidia and others. The FOMO in stocks and small junk bond spreads is often a warning sign.
I try not to go against massive uptrends in stocks. I learned that a long time ago. Stocks are currently in a huge bull run that has priced in a lot more than what is currently expected in earnings and revenues, but those no longer seem like a good means of value measurement. But sell now? Sell into the uptrend? That was the wrong call all the way up. Sellers got left behind, holders gained “bigly”.
So, there is the dilemma. Sell now, maybe incur capital gains taxes and lock in the gains (after your big tax bill is paid) or hold on, knowing that sooner or later the market is going to get cut by something like 30%, just like 2022. Or worse.
Or maybe the stock market just keeps going up another 30% and then falls 30%. You just don’t get to know.
Plan for My Investment Model: Investment Models are financial constructs, which often do not survive actual market movements. This is why they are changed, amended and tweaked along the way. But the financial model is only one component of our Financial Plan for 2025.
Plan For The Onset of Even More Madness:
1- Emotional Preparedness. Stay calm. That goes for me more than you. Wild ride ahead. Think things are crazy now? Just wait. Emotional coolness will be key. We are well ahead of plan now so if markets fall, most inventors are probably only giving back profit.
2- Cash Hoard: I hold cash in Fidelity Government money market fund earning around 4+%. This lowers portfolio volatility and provides firepower for purchases at lower levels. When opportunity appears, buying will feel horrible, because the news will seem catastrophic. This is why we hold money market fund.
3- When financial panic hits, (and it will) It will not really be catastrophic; it will just feel that way. As I often say, “stock prices don’t go two steps forward and one step back; they go three steps forward and one step back. 2022 was the one step back. The next step back is coming, we just don’t know when and from what level.
4- Maybe All This Caution is Nonsense: My opinion: Correction coming or not, longer term, top quality stocks go much higher. Much higher.
That’s the plan. Stay calm. Up or Down. No FOMO, no panic. We’ve seen this before. In the Book of Ecclesiastes King Solomon said; “There’s Nothing New Under The Sun”. All this has happened before.