"Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it"
- Warren Buffett
Trying to Predict Market Response to Future Events
A couple of months ago I wrote a column about the aphorism: “Markets Climb a Wall of Worry”. I’ve been an advisor for 28 years – and am reminded almost annually of this truth.
Our Current Walls
As I look back over the years I have worked with clients there have been significant things to be concerned with every year - and most of the time we have multiple important concurrent reasons to fret. Sources of angst vary by person, but broad categories include politics, geopolitics, valuations, natural disasters, wars, financial disasters, etc...
The current worries I hear from clients and prospects include the following:
- Disfunction in Washington: One of the values of reading biographies of the “Founders” is the perspective that political animosity is not new. However, I acknowledge that not having a Speaker of the House is unique and so is having an 80-year-old president. We are certainly in for a bumpy ride as the elections heat up next year
- Israel/Hamas: Very sad to see the targeting of innocent civilians which includes children and babies. Finding Hamas’ leaders in Gaza without significant civilian casualties will be exceptionally difficult. Fears of a broader war which could potentially include Iran are very troubling. Can the U.S. indirectly support two international conflicts at the same time?
- Russia/Ukraine: It appears this could be a long slog of a war as neither side seems able to get a decisive upper hand. Putin has used the recent war in Israel to switch allegiance to Palestinians - thus potentially allying Russia with Iran. If Putin gets backed into a corner does he unleash nukes? Does a Russia/China/Iran alliance mean U.S. hegemony is over..?
- China: China is not only cutting off ties to the West – they are also beginning to see the ugly consequences of past policy. The “one-child” policy set off a demographic implosion within China that cannot be reversed. The Chinese also borrowed with no constraints over the last 20 years - building roads and cities to nowhere – with the bills now coming due. Will they see Taiwan as a means to save face and turn things around economically?
- Inverted Yield Curve: Higher short-term rates than long rates is known as an “inverted yield curve”. In the past, it has always been a harbinger of a recession. So far, no recession - but could it happen next year?
- Inflation: Inflation is certainly less bad than it was last summer when it reached over 9 percent. However, our current somewhat “benign inflation” is in ADDITION to those prices. If you go back 3 years – it’s amazing to see how far commodity prices have gone up. The Fed is rightfully concerned that inflation becomes systemic and as a result is keeping rates high - serious headwinds to economic activity.
Finally: If you were looking for “sunshine pumping” clearly, I have not provided it. However, it's important to remember how difficult it is to predict what markets will do next. Markets frequently move different directions than the economy. Rather than trying to predict the future (inherently impossible)- and harder yet to predict how markets will respond to that future event, focus on living your best life right now. Let your basket of global capitalism grow significantly but erratically in the next 10, 20, 30+ years and be at peace that you have taken a prudent course.