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What Will Surprise Us Next?

There is a drip, drip, drip of surprises that has been fueling the rapid decline of stock values. These surprises are causing fear and worry, even among those who have invested wisely. If you have these same feelings, the rest of this article was written for you.

First of all, we are witnessing a series of unprecedented events. By the way stock prices reacted, investors were unpleasantly surprised by the shutting down of major sporting events and Saudi Arabia boosting production while cutting prices. Trump’s restriction on travel from most of Europe also caught investors by surprise. Although his misstatement about banning cargo from Europe was later corrected, it harkened images of the Great Depression when protectionist policies made a bad situation horrendous.

As these surprises take hold, we should expect worldwide economic activity to continue to slow. Many individuals and businesses will be hurt by this slow down. It’s hard to imagine that we are not already in a recession and easy to imagine that this could lead to a depression. While some quip that a recession is what happens to your neighbor and a depression is when it happens to you, depression is actually a type of recession, one that lasts longer and goes deeper than most. And I cannot imagine this recession not affecting everyone, turning into a depression.

What I expect to happen is:

  • The financial impact of this slowing will be very costly.
  • The slowdown (recession / depression) will last for a while. (My crystal ball gets very cloudy when I look to see how long or how deep.)
  • We will eventually recover physically, financially, and emotionally.

So, what does this mean to the investment markets or, more specifically, what you need to consider about your investments? Because investments are based on expectations of long-term economic activity, which extends far beyond this current downturn, you should expect your broadly diversified portfolio to survive this downturn and generate expected returns in the future.

Part of the reason comes from the lesson that history has taught us, i.e. that investor sentiments change. It is reasonable to expect that when the drip, drip, drip of fearful surprises slows, investors will become less fearful and more willing to accept investment risk. As they do, the price of the risk premium will drop causing stock values to rise. This is especially true when these fears give way to thoughts of future opportunity, even if it happens while the economy is still struggling with the effects of the slowdown.

Because history has taught us that the change in investor sentiments happens suddenly, often with a big bang (large move), missing these turns has proven to be very costly to those who thought it best to sit out the remainder of the downturn. The often-promoted agility of moving in and out of investment markets has been found to be hazardous to investor’s financial health because, more often than not, it simply locks in losses instead of delivering the promised results.

The picture of changing investor sentiments leads to the question: what will surprise us next? Will it be another series of events that harken more fears or will it be surprises that reduce our fears and raise our hopes?

Although trying to time changes in the investment market has been found to be hazardous to your financial health, there’s never a bad time to receive good advice. We hope you will contact us if we can help.