My sixth grade teacher, Mr. Lewis, always said “One reason might make you believe something, but I need three sound judgments to be convinced.”
He was teaching us to make intellectual arguments, preparing us for debate – whether with classmates or within our own minds – and hoping the process would give us sound, sensible underpinnings for our belief systems.
I was reminded of this recently when catching up with a former classmate. The conversation turned to investing and the stock market and he talked about being nervous around current conditions, especially as we near retirement age. When I said that I’m not especially worried now, he put on Mr. Lewis’ voice and said “Give me three good reasons why.”
I can do better than that. I can provide both sides of the argument, three reasons to be optimistic and/or pessimistic about investing right now.
It’s not just some exercise in debate for me, right now, it’s actually my inner monologue, caught between the optimism borne of the economic reopening and recovery and the pessimism of lingering concerns brought to mind during the pandemic and not fading from my mind any time soon.
If Wall Street climbs the proverbial wall of worry, these are the bricks that give investors balance and a foothold along the way.
Here are three reasons I’m nervous about investing right now:
1) Inflation. The big question is whether the run-up we’ve seen in prices is “transitory” – a side effect of the pandemic shutdown and the economic reopening – or something more permanent that would force the Federal Reserve to step in and put the brakes on the economy.
Inflation could be near 4% this year, and while that feels high given the rate of inflation over the last few decades, there’s also no denying that the recovery has skewed a lot of numbers.
If inflation starts scaling back as we get to 2022, this concern likely passes, but if high and/or rising inflation is going to be a concern for several years, it won’t be good for the market.
2) Rising interest rates. Increases in interest rates affect both bond and stock prices, and therefore have a dramatic impact on investors.
When rates rise, bond prices fall. That hurts – at least temporarily – bond funds and safe-harbor investors.
But rate hikes also force investors to reconsider how much they are willing to spend on each dollar of future corporate earnings; that can hit stocks with high price/earnings ratios hard, so Big Tech investors are justifiably anxious.
While Federal Reserve chairman Jerome Powell has repeatedly said he’s in no hurry to hike rates, he’s also said the Fed isn’t doing much to put downward pressure on long-term rates. That creates uncertainty, which is likely to make the market more volatile until there is more clarity.
3) The recovery could end sooner than expected, or there could be a COVID relapse. There is no denying the pent-up demand as coronavirus shut-ins resume normal lives, and how that is creating huge economic growth this summer, but how long the spending celebration lasts is a real question.
The economy entered the pandemic in a slow-growth mode; if the spending bulge passes and the economy falls back to pre-pandemic growth levels, the market is likely to register real, long-lasting disappointment.
Moreover, any return of COVID or shutdown caused by the emergence of viral variants could end the recovery party overnight.
Flipping things around, here are three reasons for optimism now:
1) For years, there will be some part of the world in recovery mode.
Effectively, the world went into pandemic mode at the same time, with every economy feeling the pinch roughly at the same time, but that’s not how the recovery is going to work.
The U.S. and China have been emerging from pandemic first, but Europe is coming along and still there are many parts of the world – notably India and other emerging markets – that are still in the throes of the pandemic. They will begin their recovery as the pent-up demand here is exhausted, creating global opportunities.
International diversification may pay off more in the next decade than it has in the last 10 to 15 years.
2) You can react to the troubles you see coming. Just this week, Jamie Dimon, the top dog at JPMorgan Chase noted that his company has about $500 billion in cash on its balance sheet, and has been stockpiling cash waiting for the chance to invest it at higher rates.
Individuals can plan for those conditions too. Financials, energy companies and a few other industries have done well, historically, in times of rising rates/inflation. There is nothing wrong with investing defensively to address your concerns.
3) Signs point to “a correction,” but not an impending market crash or long-term bear market.
For all but the extremists, today’s concerns could lead to tomorrow’s downturn but are not a trigger to a long-term, protracted, life-changing bear market. There will be some painful moments ahead – there always are – but generally solid economic underpinnings go a long way to ensuring that downturns will be contained rather than protracted.
In short, while it is fair to expect a downturn, “worse than ever before” feels exaggerated and panicky.
Mind you, the six items on these lists are mere touchpoints. They’re not comprehensive. Tax policy changes and infrastructure spending plans, for example, are other potential negatives or positives. There are many other data points you can factor into a more detailed conclusion.
To me, however, having what I consider equally compelling reasons on the pro and con side is a good sign that I’m more likely to worry my way up from here than I am to see the market fall off a cliff.
I’m more nervous about being wildly optimistic or slightly panicked than balanced. Having concerns on both sides should make it more comfortable to stay the course, stick to your investing framework and stand pat as these situations play out.
Chuck Jaffe is a nationally syndicated financial columnist and the host of “Money Life with Chuck Jaffe.” You can reach him at firstname.lastname@example.org and tune in at moneylifeshow.com.
Copyright, 2021, J Features