A mere six months ago, in October, growth was a given, prosperity confirmed, and it was understood that the Fed should be raising rates. But the cool autumn winds brought a chill to our confidence, and dampened our expectations.
Three months later, in the month of December, we were mired in the pit of despair. Confidence was shattered, as equities and bonds plunged ever deeper, and panic was in the air. The gloom deepened into the darkest day of the year, and then remarkably, as if predicted by the ancient Druids, the winter solstice marked the turning point toward light and prosperity once again – just when most expected the worst was yet to come.
In the ensuing months the mood altered considerably, with the Fed changing its tune from tightening, to neutral, to perhaps even loosening strings once again. And now that we are past the Ides of March we find our hearts and moods lightened once again as the markets soothingly soar.
And so the truism proves its worth – whenever we are certain to expect one thing, we can more assuredly count on the opposite coming to fruition – expect the unexpected. While this may not apply to life as a whole, it works with startling consistency with the markets and investing. And I have seen this to be most true when, as individuals, we become convinced of the strength of the conviction.
So we now find ourselves in a position where equity benchmarks in the US have almost reached their former highs from last August. But … the Fed is now cautious, and the yield curve has inverted, which hints of a recession in the wind. Along with these ingredients we can add the eye of newt, toe of frog, as well as the teetering threat of Brexit, along with trade wars and tariffs that blend to form the nasty brew awaiting us.
The world is seldom a certain place, and even if we were to consult the fates, we would still be left to interpret their cryptic message. Sage advice comes from many angles, and very often that which is pitched most convincingly should also be very quickly discarded. Another truism - free advice costs nothing, and is often worth as much.
Well-reasoned advice, on the other hand, is usually dispensed in quiet, lucid and logical tones. There is no rush to act, but a plan to be fashioned and followed. In constructing New Grange, Stonehenge, Machu Picchu or any other countless monuments measuring the earth’s movement relative to the sun, carefully planned and executed strategies served to illustrate the power of intellect over emotion. Intellect (thousands of years ago) calculated and demonstrated the exact moment at which the earth would reach of its winter and summer apogees, the solstices, and show the sun shining through specifically designed channels or grooves. This amazed the masses then (and also now), and served to persuade the people that all was well again. Careful planning and execution delivered astounding results.
But even the best made plans are often tested or strained. We second guess ourselves, and when great forces bring powerful pressure to bear, like a 20% market correction from August to December, we are often tempted to break from the plan. Convincing voices surround us with conflicting news and advice, sowing the seeds of doubt, leading to actions driven by fear or greed. And many times we break from the plan, perhaps the plan wasn’t strong enough, perhaps it was the wrong plan, or perhaps it was the wrong plan for us. Newly made plans are most susceptible to second guessing.
Conviction is then the antidote. In the heat of the moment, in the middle of the fray, in the depths of despair, conviction can win over the heart. Our minds are very powerful and we can easily convince ourselves of what we choose to believe. If we are able to focus our minds on the plan, as did the ancients, and stick to it while making minor adjustments, greatness large and small, can be achieved.
So the question of what to do when the runes point to a recession? Stick to plan. Make minor adjustments. Implement defensive strategies where appropriate. Expect the unexpected – if we expect markets to fall, there is a good chance they will go the other way, and vice versa. Most importantly, don’t fall prey to urgent voices dispensing free advice. It often ends up costing lots more than what it’s worth.