At the extremes of market moves, whether up or down, prognostications of the future begin in rapid-fire succession from soothsayers. When downside prevails, the predictions get increasingly dire. But this makes for huge missteps when an unforeseen event feeds a violent upside reversal. Just such a reversal happened earlier this week, with the market jumping 1800 points in 26 hours. The emotion of loss, and fear of more, whets the appetites of news consumers and outlandish predictions get lots of clicks when they once would have been dismissed as nutty. When bad news swirls, people stack up on one side of the boat, and stampedes occur to the other when the news changes. We prefer to stay in the middle of the boat and avoid the fray.

There is an old brokerage story of an advisor talking with a client who, in mid-February, says to the broker that “at the current rate of loss, I will be out of money in six months.” He replies that with two feet of snow falling last night, it will likely be 80 feet thick by August. This was the broker’s somewhat outlandish way of saying nothing lasts forever. February blizzards beget August heatwaves; some market movements are predictably cyclical like the weather, others causative like low oil prices reducing exploration and setting up higher prices later.  

The market moves in much the same way. The steady run up contains threads of the next convulsion since it has seeds of confidence: the more extreme the confidence, the more extreme the surprises. Next time I think the upside reversal will be brought on by a surprise interest rate move, maybe a pause, just as rising rates have caused the current gyrations. I also think the Fed will make just as many mistakes in its hapless efforts to repair the economy’s balance as it did in getting us here. That means the Fed will overshoot on rates, making the recession worse than it would have otherwise been. This problem arises when you act in reactionary rather than anticipatory ways. It also stems from the trend of politicizing all aspects of government. The natural waves of the economy are made more violent by timed and word-smithed responses aimed at garnering political points. The Fed is supposed to be immune to this. I don’t offer a solution. Instead, I suggest we all be mindful. 

How could this play out? Housing is already turning, with mortgage rates doubling this year. Housing starts are down over 70%, which is confirmed by my concrete buddy, who says foundation pours are off by half or more. If the Fed keeps up the rate pressure, they will get new house starts to zero, but shutting down construction is probably unwise.  

At some point, rates will peak and propagate the reversal. The negative sentiment that has overshot by then will also reverse, throwing the market into high gear. This may already be happening with the market’s big upside move this week. This should be evidence enough that you cannot navigate this from the sidelines until you “feel” better about it.

Investors should be accumulating bonds that have gotten decimated and they should do so now while rates are higher than at any time in the last 15 years. They should accumulate more blue chip stocks, too, with their dividends and tax advantages now that many have lost a third of their value. Don’t go whole hog; just tiptoe at this point. Time has shown that it is a healer of these issues. 

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