The Fakey-Breaky Heart Market
If there was a September song for financial markets in 2021 it may be titled Fakey Breaky My Heart. And, just like a good country song, if you were to play it backward you would get your partner, your dog, and your truck back along with a 6-pack of Pabst Blue Ribbon as an extra bonus track. (Country Music - YEAH!)
Readers of last month's “Minutes” may recall that we penned lyrics that described the market's chorus as ranging within an inflection zone. We also shared in our bonus video, reviewing the lines in the sand we have been watching in equity markets that are helping us define whether this apparent inflection zone will result in a break-out higher to new all-time highs and a potential parabolic blow off crescendo style top or a more subdued break down of support, opening a window for equity markets to go through an overdue correction that may help tone down some of the current frothy pitch in markets.
By mid-September, equity markets seemed to be singing the song of a breakout to higher levels when suddenly someone changed the record on the jukebox, and markets shifted to playing their best rendition of Fakey Breaky My Heart. Sadly, rather than breaking out higher through resistance, markets broke hearts instead and performed a mid-month reversal to the downside, ending the month in a precarious position.
What may be next?
Equity Market Volatility increased significantly, the VIX, which is a benchmark used as a measure of short term volatility and fear in equity markets, increased from Bar Mitzvah age (read 13) to well over the age of being able to rent a car (VIX peaked near 28) and as of this writing is resting around voting age (18). Quite a ride in a couple of weeks?
Fears of a financial crisis in China - Could China be sending us an economic COVID? China's overheated real estate bubble is starting to pop and Evergrande, a giant Chinese property developer, is heading toward defaulting on more than $300 billion in debt. Its failure could trigger a cascade of defaults among banks, materials suppliers, and investors, potentially leading to broader financial issues in China and abroad.
Remember Lehman Brothers in ‘07?
Well, basically a similar event is happening in China. This has increased concerns that certain outcomes could lead to a breakdown of confidence and an increase in counterparty risk within the Chinese economy and potentially sparking risk of a larger global contagion.
Though it’s unlikely either party will allow the U.S. to default on its obligations, this political brinkmanship adds anxiety each time it comes up. Another government shutdown could exacerbate political risks to markets.
The Retirement Red Zone
Is there a possibility you may need a portion of your retirement savings or investments for a life change like retirement or health care in the next five years?
If so, you may find yourself in the Red Zone.
Unfortunately, for those in the Red Zone, stagflation and inflation can cause a lot of chaos and confusion in investment decisions. Especially for those that are needing their investments to produce growth, income, and conservation during times of increased volatility.
For those that find themselves in the Red Zone, an important item to remember about stagflation (and inflation) is how few investments can produce growth, income, and conservation during extended periods of stagflation.
This leads to the importance of two types of knowledge. One, knowing which assets do well and not so well during times of stagflation and inflation. Two, knowing you have access to and the ability to easily invest into those asset class options within your retirement or 401(k) accounts.
In regards to point one - In times of Stagflation Focus on Forward Returns vs. Past Performance. It’s a good thing for Red Zone Retirees to remember that most wealth over the past 30 years has been created by Equities, Real Estate, and Bonds. All assets that benefit from the lower trajectory in interest rates and inflation rates we have experienced in that time frame. This has also allowed these assets to trade at lofty valuations relative to their historic norms as you can see by the chart below courtesy of Steve Blumenthal at CMG Wealth.
If the future has the potential for a different trajectory or even a change in the rate of that trajectory, markets will have a tendency to adjust valuations in order to align with new expectations. Those adjustments could lead to a period of time when making investment decisions based on how something has performed over the past year becomes a detriment to the wealth-building process. With that in mind, It may be worth considering the value that may come from focusing on the potential of forward returns instead of past performance.
Consider the following chart from www.cmgwealth.com that projects the potential future returns of various asset classes from where we sit currently out for the next 7 years. Fairly sobering and should encourage us to know our investment options or at least have a “guy” that does know about those options.
Options like Self Directed IRA’s and Brokerage Window options within some 401(k)’s may give you the opportunity to invest in vehicles that can supplement your retirement investment diversification and hedge or profit from times of stagflation.
We can help….Knowing your options and setting those options up takes time, let us save you time and energy, contact us and we will help you find the right Retirement Account Custodian for you.
As much as we appreciate your attention, in order to keep things brief and to make sure that the trends we are seeing as future opportunities that we want to bring to your attention don't get overlooked, we will be publishing The Next Investment Wave next week.
In last month's Next Investment Wave we discussed the apparent secular bull market developing in the Agricultural Technology sector, make sure to check it out here.
In the upcoming issue of Next Investment Wave we will be drilling down on the Healthcare Technology sector and how it may benefit from a time of stagflation or inflation, keep your eyes peeled, it’s a must-read if you are looking for opportunities to create growth in a portfolio.
Random Thoughts to Leave You With….
This is how the brains at Yale and Harvard have been allocating:
Keep this on your radar….The chart on the U.S. Dollar is looking more bullish and if that is the case, holders of Gold, Silver, Crypto, and other risk assets may want to pay attention to their risk and cash levels. Stay tuned as we update you on this in the future.
Meet Our Contributors
Founder, Quiver Financial
Director of Retirement Services,
Director of Alternative Investments,
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