Risk/Reward Vol. 229
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“I say we can dance/We can dance
Everything’s out of control
Oh, it’s a safety dance
Ah yes, it’s a safety dance.”---lyrics from “The Safety Dance” sung by Men Without Hats
“I wanna be high, so high
I wanna be free to know
The things I do are right”---lyrics from “Easy” sung by The Commodores
“I can’t believe it’s happening to me
Some people wait a lifetime
For a moment like this.”---lyrics from “A Moment Like This” sung by Kelly Clarkson
By the time our flight from Seattle landed last Friday afternoon, I had completed the first draft of what was to be last week’s Risk/Reward. It was one day after the downing of the Malaysian Airliner, an event that predictably had caused the markets to do a “Safety Dance.” The Dow Jones Industrial Average had fallen 162 points on Thursday (the day the airliner was shot down), and the yield on the 10 Year Treasury had fallen from 2.54 to 2.47. My theme was how investors react when they perceive that “Everything’s out of control”; to wit, they sell equities and buy Treasuries. You can imagine my surprise when I checked my iPhone as we taxied to the gate and learned that the markets had recovered most of the previous day’s losses and that the 10 Year yield had stabilized---this despite no resolution of the Ukraine situation and a worsening of matters in Israel. How could this be? What happened to the ‘safety dance/yes, the safety dance?” I deleted the draft and began to ponder.
And ponder I continue to do. Another week has passed and if anything, the situations are worse in both hot spots. Yet, apparently on the strength of so-so domestic economic news and less than sterling earnings reports, the US stock markets just “wanna be high, so high.” They reach for new records virtually every day except yesterday of course. Meanwhile, the yield on the 10Year holds steady around 2.5%. Each financial news story that I read or report that I hear features someone warning of a coming stock market correction and/or a collapse of the bond market. But, Mr. Market seemingly just doesn’t care. And lest we forget, Mr. Market is the only one who matters. He is “free to know/The things he does are right”---each time and all of the time.
So what does a rational investor do? No economic or financial data justifies the stock market’s unceasing march upward or the year to date performance of the securities priced in relation to bonds (the kind I favor). That said, I am up nearly 10% year to date. Literally, “I can’t believe it’s happening to me.” Until yesterday, it’s been another day, another gain; a situation for which “Some people wait a lifetime.” And yet I am exceedingly uncomfortable. Was Friday's triple digit loss on the Dow an ephemeral reaction to disappointing news from Amazon and VISA or is it a harbinger of things to come? My rational self tells me to sell and to head to the sidelines with my outsized profits in tact (remember I only seek an annual return of 6%). But my competitive self is caught in the euphoria of the day and urges me to stay. Why liquidate at “A Moment Like This”?
In sum, I am living a Kelly Clarkson greatest hits album. One side tells me to “Just Walk Away.” Another side asks “Don’t You Wanna Stay Here a Little While?” A moderate drop wouldn’t kill me and I know “What Doesn’t Kill You Makes You Stronger.” But if I were unable to recover from such a drop by year’s end, “My Life Would Suck.” I solicit input from you, my Loyal Readers. That way, whatever course I choose, I can say it was “Because of You.” In the meantime, I ponder on.
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