Chaos

Yesterday was a dark day for our country. I watched in horror as an angry mob stormed the Capitol Building, besieging the capitol police. Certifying the Electoral College votes is typically a ceremonial event, administered without fanfare, but not yesterday as rioters forced Congress members to put on gas masks and flee the chamber. The last time unruly thugs stormed the Capitol Building was 1812, 209 years ago. Despite the chaos, the market snubbed the news and closed higher, and today it’s trading to all-time highs.

I talked with a few clients yesterday who were concerned about a market sell-off because of the domestic terrorist attack. They wanted to sell their holdings and wait for the storm to pass. I recommended they stay invested since the event would probably be short-lived. As I addressed their concerns, they were surprised the market was trading higher.

The market historically has overlooked political unrest and disruption. As Joe Kernen of CNBC said this morning, “The market has no conscience.” He’s right. It has no soul or moral compass. The stock market focuses on economic activity, earnings, and interest rates, to name a few. It looks forward, paying little attention to today’s news, especially if it does not impact America’s economic engine.

On September 11, 2001, foreign terrorists attacked our country. The Dow Jones fell 17.2% for about two weeks but quickly rebounded. By January 1, 2002, it recovered.

President Ronald Reagan’s assassination attempt was on March 30, 1981. I was in high school, sitting in a psychology class, and my teacher brought in a TV to let us watch the dreadful event. The Dow Jones dropped 2.25% after the shooting, but it regained the losses a few months later.

President Nixon resigned in disgrace on August 9, 1974, because of the Watergate Scandal. The Dow fell more than 20% over the next few months, but it had recuperated the losses by April 1, 1975.

President Kennedy was killed on November 22, 1963, in Dallas, Texas. The Dow dropped 5.6% on the shocking news, but by January 1, 1964, it was trading in positive territory.

If you’re concerned about chaos and uncertainty, here are a few suggestions to help you manage your investments.

  1. Do nothing. During the initial hours or days of an attack or unprecedented event, the market may fall, but it won’t stay down for long if the news isn’t impacting the economy.
  2. Buy more. If there is not a structural hit to our economy, the market will quickly recover. The best bargains for buying stocks are during the dark days of a decline.
  3. Follow your plan. Events like yesterday are short-lived, and your financial plan can last decades, so don’t sacrifice a few days of turmoil for years of growth and prosperity.

I was saddened and upset to watch the attack on our Capitol Building, and I couldn’t believe insurgents breached the security detail. Unfortunately, our country has been littered with horrible and unspeakable acts, like Abraham Lincoln’s assassination, the Pearl Harbor attack, and Bloody Sunday in Selma, Alabama. Our great nation is 245 years young with many great days ahead, and a few domestic terrorists will not derail our country’s ideals or beliefs.

May God continue to bless the United States of America.

America will never be destroyed from the outside. If we falter and lose our freedoms, it will be because we destroyed ourselves. ~ Abraham Lincoln

January 7, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

Certainty

We want certainty in an uncertain world. We want to know the weather report, and what’s for dinner, and where we’ll spend our vacation, and how our stocks will perform. If given a guaranteed chance of receiving $100 or a 50% chance of receiving $200, most of us will opt for the certain payout of $100.[1]

This past Saturday Saudi Arabia’s Abqaiq oil processing facility was attacked. The world’s largest oil field can produce close to 10 million barrels of oil per day, and this attack could knock out 50% of the kingdom’s production.[2] Because of the attack, West Texas intermediate crude oil spiked 14%.[3] How do you plan for a strategic strike on the world’s largest oil exporter? You can’t.

In 2016 Dennis Gartman said oil would not trade above $44 “in my lifetime.”[4] Crude oil closed at $61.56 on Monday. He was certain in his prediction.

Last year, Jamie Dimon, the CEO of JP Morgan Chase & Co, predicted the 10-year U.S. Treasury would hit 5%. It currently yields 1.79%.[5] He’s now preparing for 0% interest rates. Mr. Dimon has his pulse on the economy as the CEO of the world’s second-largest bank, and if he can’t predict the direction of interest rates, let alone the level, who can?

I feel sorry for analyst and experts who are forced to give price targets or predictions because it’s an impossible task. However, investors and the media want answers. If an analyst provides a price target, they must know something we don’t. But they don’t. It’s an educated guess. It gives us a false sense of security because we want the assurance that somebody somewhere knows something.

I worked for Morgan Stanley for several years, and after Dean Witter merged with Morgan Stanley, I was talking to an analyst about stock research reports. He said institutional clients focus on the depth of the research while retail investors look to the price target. Retail investors are looking for certainty.

Certainty is safety. If you bought a U.S. T-Bill and held it to maturity, you would never lose money because they offer a guaranteed return. T-Bills have generated an average annual return of 2.3% for the past 15 years while inflation averaged 2%. Stock market returns are uncertain and not guaranteed. The S&P 500 has returned 6.8% annually for the past 15 years, despite a 56% drop during the Great Recession. Certainty and lower returns are linked.

How can you plan for certainty in an uncertain world? Here are a few suggestions.

  • Financial Plan. Your plan will account for uncertainty, chaos, and disorder. The Monte Carlo simulation outlines several outcomes – some good, some bad. Money Guide Pro financial planning software will run 1,000 different scenarios to provide you with a range of possible results. John Maynard Keynes said, “I would rather be vaguely right than precisely wrong.” A Monte Carlo analysis will give ranges that will be vaguely right.
  • Short-term bonds will give you predictability and liquidity. When the world erupts in bedlam, short-term bonds provide a high degree of safety. Bonds and stocks are inversely correlated, so when one rises, the other falls.
  • A cash reserve will give you access to your money without having to sell your stocks when they are down and out. Cash levels vary depending on your situation. A recommended amount is three to six months’ worth of your household expenses. If you’re about to retire, I suggest holding three years’ worth of cash in a money market fund or investing in short-term bonds.
  • A globally balanced portfolio will give you exposure to thousands of securities scattered around the world.
  • Embrace uncertainty. Chaos and disruption allow you to purchase stocks and other risk assets at deep discounts. Buy low and sell high. When others are panic selling, you can buy great companies that should eventually rebound.

The only certainty is uncertainty.

“What you should learn when you make a mistake because you did not anticipate something is that the world is difficult to anticipate. That’s the correct lesson to learn from surprises: that the world is surprising.” ~ Danny Kahneman, Nobel Laurette – Economic Sciences (2002)

September 18, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

 

 

 

 

 

 

[1] https://www.gsb.stanford.edu/insights/why-uncertainty-makes-us-less-likely-take-risks, by Dylan Walsh, June 1, 2017

[2] https://www.cnbc.com/2019/09/16/aramco-saudi-arabia-attacks-on-oil-supply-wipes-out-spare-capacity.html, by Huileng Tan, 9/15/2019

[3] https://www.cnbc.com/2019/09/15/dow-set-to-fall-on-fears-spiking-oil-will-slow-the-global-economy.html, By Fred Imbert, 9/15/2019

[4] https://finance.yahoo.com/news/dennis-gartman-best-contrarian-indicator-165610794.html, By Wayne Duggan, June 8, 2016

[5] https://www.marketwatch.com/story/jamie-dimon-warns-of-5-treasury-yields-but-sees-stock-run-lasting-a-few-more-years-2018-08-06, by Rachel Koning Beals