This is why you don’t run off and join the circus

Today’s mini-panic over the new variant of COVID has been rocking the markets all morning, around the world. Stocks are lower for the most part, as the Vix has spiked from high teens to high twenties. I don’t know whether or not this new strain of the disease will be something we’ll be talking about for six months or six days. You don’t either. Which is why the durable, balanced portfolio you’ve built for yourself was the right answer last week and is still the right answer this week. It will be the right answer next week too.

The S&P 500 was up 27% on the year heading into this morning’s down two percent open. We have plenty of room to give some of those gains back if that’s what is necessary for the new uncertainty to ripple through the markets and for risk to be repriced. We have been through this process many times. It used to take months, now it takes days or hours. Stop logging into your accounts during these days or hours. Do yourself that favor.

The Dow is down more than 900 points today as I write this post. A 900 point down day used to be a generational market crash not long ago. In 2021 it’s just a rough day. Ten years ago this fall, the Dow Jones was regularly fluctuating by 500-700 points each day as the European Union’s debt crisis had the ability to roil each morning’s headlines for months on end. The Dow was 11,000 and change at the time. 700 points was a big deal. It would trip a circuit breaker and shut the market down temporarily. Today, the Dow sits in the 32,000-35,000 range. It has tripled. The Nasdaq has more than quintupled. Nine hundred points up or down just ain’t what it used to be.

Now, imagine someone who had run off to join the circus this year. Someone who had thrown out all their bond exposure and went all-in on high growth, high beta stocks. Did their friends getting rich with ridiculously easy trades drive them to it? Perhaps. J.P Morgan said “nothing so undermines your financial judgement as the sight of your neighbor getting rich.” The lure was hard to resist. The “Everything Rally” beckoned. Your teenage kids were getting rich too, using little more than their phones and the two brain cells they had left to rub together. If the gains of the last couple of years convinced you it was time to overload on crypto, use margin, sell naked calls, buy far out of the money options, levered ETFs, etc – well, now you have an opportunity to rethink those choices. Now you see what markets can do to your account value when they become two-way again.

For those questioning the role of Treasury bonds in a balanced portfolio given their sub-inflation income payouts, today’s action is a nice reminder of why bonds still have a place at the table. For those who were panicked about oil prices skyrocketing and runaway inflation from the “reopening”, today is a good chance to see what an actually negative scenario might look like. In our endless race to nominate the next thing to worry about, we forget so easily that there are levels to this shit. Higher gas prices are preferable to mutated viruses escaping South Africa, oui monsieur? 

This could absolutely get worse. That’s certainly what the airline and hotel stocks seem to be pricing in. Or it could just be another minor scare that comes and goes – remember the Lambda Variant? Even the scientists who’ve devoted their lives to studying pandemics and infectious disease couldn’t say for sure. Building a portfolio that can withstand and capitalize based on either outcome is the only rational decision when faced with uncertainty like this. Throwing out the whole playbook and calling audibles based on your moment to moment emotions is probably the worst possible thing you could do right now.

Have a nice weekend. Talk to one of our financial planners about your own situation if you need to.