I got up today to find the markets poised for another decently sized sell-off and that is what is happening as I write this – the S&P is around 1050 and the Dow is at 9849 with all the gains since November wiped away. The VIX, a gauge of market volatility and hence “fear”, is hovering around 40 (the same levels we saw after 9/11, Long-Term Capital, the Russian financial crisis, and the WorldCom bankruptcy filing). The worries are the sovereign debt problems in Europe will soon engulf Spain and that the recovery here in the UK may not be as assured as many hoped. If your business needs help, use the next link to find about the best UK IVA Companies.
And yet I find myself feeling a significant amount of relief. While I’m certainly not happy to see those gains since November wiped away (and possibly more – it’s still not even noon), I have been uncomfortable for months on end as the markets relentlessly plodded upward while none of the underlying reasons for the recession have been adequately dealt with. There has been a significant disconnect with what was happening in the equity markets and what was not happening with financial regulation, debt levels, toxic assets, or austerity measures. Now, perhaps, the markets may finally be catching on and that is a very good thing.
It is a good thing because it hopefully brings rational thought back to the forefront. It means that we may be entering a period when the necessary changes can actually be instituted and not blocked or watered down by ridiculous politics. Here in the U.S. we are getting much closer to passing the most sweeping financial regulatory reform in decades. I’m not saying they will get everything right, but it is a step in the right direction. By getting closer to the brink in Europe we are beginning to come to grips with their problems, too, although we are likely at the beginning of working our way through that. The point is, we are finally…hopefully…beginning to be honest with ourselves. Do I think we will continue to remain honest and objective? Certainly not. But the last 13 months of persistent irrationality have actually been quite painful for me and I am finally getting some relief, albeit in a rather backwards sort of way.
So, we should all do ourselves a favor and try to embrace the short term fluctuations we are now experiencing as something strangely positive. Maintain an eye toward the longer term and take solace in the hope that we are getting closer to a market environment where long term development issues can actually be a part of the discussion (just look in today’s Financial Times for examples about shale gas “changing the world” and emerging markets helping the developed world avoid a “lost decade”). Don’t waste your time worrying about which asset class will be most protective over the next day/week/month or how to capitalize from this market sell-off because your chances (or your active manager’s chances) of being right are probably less than 50/50 for reasons I’d be happy to discuss. Do not be attracted to those alternative asset classes that have become so popular during uncertain times such as commodities, currencies, and all the strategies around them – let the “experts” get their shirts handed to them and stick to the markets and asset classes that actually create tangible value for investors over the long-term. Rebalance as necessary and trust your long-term asset allocation if it was well conceived in the first place, and if it wasn’t or you’re not sure then please get in touch. I’ll be happy to help.