Much Ado About Nothing
In general, people tend to worry too much. In some cases, excessive worry is a sign of genuine mental health issues that you shouldn’t ignore. However, worrying about the investment markets indicates you either don’t have a financial plan or don’t fully understand your plan.
Financial planning should give you the confidence to live through challenging financial markets and still reach your goals. It’s meant to keep you from worrying.
At Nicollet Investment Management, we have lived through many tough markets. I’d like to say that during those tough markets, none of our clients call us with concerns, but that’s not true. When markets are tough, a self-reinforcing wall of worry emerges as people talk to friends and listen to the news. It’s hard for them to shake, and so, we do get calls from clients.
However, in my experience, all we have to do is review the client’s plan with them. First, we remind them how their plan was constructed to anticipate periods of difficulty. Then, we show them again how it works. Typically, after that discussion, their worries melt away.
I can also say we seldom hear from clients who have lived through more than one tough market with us. They know how their plan works and have experience with it.
On the other hand, it’s my opinion that if you go it alone, doing your own planning and investing, you could find yourself in trouble when markets turn tough. Many prepackaged investment products are attractive because of their convenience and appeal to retail investors. That is fine when markets are calm or going up, but that convenience can be a trap when markets turn tough.
We’ve talked extensively about issues that could arise from owning bond mutual funds and why those who use these funds for their bond investments may have a good reason to worry.
Crosscurrents in the interest rate market can have significant negative consequences in bond fund land, as occurred during the early days of the pandemic in 2020. If you think that can’t happen again, you may want to reconsider.
In early May, both stock and bond markets were sailing with the S&P 500 reaching record highs. The vaccine roll-out was moving along, and a new round of stimulus hit the economy. After the long dark days of the pandemic, happy days were indeed here again.
What could there be to worry about? If you have been around as long as I have, there is always something; recently, the concern became inflation.
With commodity prices soaring and inventories dwindling during the spring, the inflation narrative gathered steam. Questions were raised on the soundness of the Federal Reserve’s stated policy of letting inflation run for “some time.”
The impact of “easy money” and massive fiscal stimulus impacted prices and economic growth. According to the Bureau of Economic Analysis, GDP was an impressive 6.4% in the first quarter. Some so-called experts wondered vocally in the financial press if the central bank should change its tune.
Concern about structural inflation morphed into worry, and the broader markets for stocks and bonds fell as May inched along. The action fueled a feedback loop with even more talk about inflation and its negative impacts.
By May 13, the S&P 500 was down nearly 5%, according to Yahoo Finance and interest rates edged higher.
After peaking at a yield of 1.73% in March, the 10-year U.S. Treasury yield had drifted lower to 1.53% by mid-April. Falling yields implied investors were not worried about inflation. But in May, yields moved back to 1.69% as fear and irrationality temporarily took hold.
It didn’t last long.
The debate is now deadlocked between those who feel today’s inflation is a simple transitory outcome of the economy reaccelerating. In other words, inflation will not be a problem beyond the next few months vs. those who feel the easy money policies and massive stimulus packages will create long-term inflation to be with us for years.
Right now, the transitory inflation camp’s narrative is winning. As May closed, stocks were climbing once again, and the ten-year Treasury yield was drifting below 1.60%. That’s the market saying that inflation will indeed be temporary.
In other words, the month of May was, in Shakespeare's words: much ado about nothing. In our opinion, the jury is still out.
What’s the antidote to all this worry? The answer is a customized portfolio built to your specifications with an individual bond portfolio held to maturity. That’s precisely what we do here at Nicollet Investment Management!
To learn more about how to reduce worry about markets and investing in your daily life, give me a call. I would love to chat with you.