Not a day passes without someone warning of an impending correction, overvalued equities, and rumblings in bond markets, not to mention a seemingly endless series of geopolitical crises and potential domestic imbroglios over government spending, government shutdowns, health care, and tax reform. And yet, markets have so far failed to do much but shrug and meander in place.
It should be taken as a given that a 5%-10% correction is always possible, at least for equities, for one reason or another. It’s best, in fact, to assume that such corrections will occur from time to time, and that for higher beta stocks, the number will be greater than 10%.
In a time when the Federal Reserve has begun to raise short-term rates modestly, after years at the zero bound, bond investors also could expect a resetting of yields and prices, and accept that years of price gains on bonds might not be in the offing.
It also should be taken as a given that equities can surge 5%-10% quickly, perhaps because of a few good earnings reports, a global crisis that subsides, or any number of other reasons. And, of course, interest rates can go up or down 50 basis points or more in a matter of days, after long weeks or months of moving hardly at all.
Such moves can happen in a blink of an eye—far too quickly, in fact, for most investors to react either meaningfully or constructively. Read too much into the downward moves, and the result will be premature, precipitous selling that may be regretted in retrospect. Rush in when assets are jumping, and the result could be a brief momentum trade that ends as quickly as it started.
That is why being well […]