"Don't Fight the Fed"
“Don’t fight the Fed” is an old Wall Street saying. That is the only explanation I have for market performance in 2020. There is a great deal of bad news and yet the S&P 500 reached an intraday record this week and may very well close at a new high in the midst of a recession.
Of course, a recession is only officially determined after it has ended so we are not officially in a recession. We have a Main Street America and a Wall Street America and right now they are not traveling the same path. Differences aside, American small businesses seem to be increasingly optimistic about business rebounding in the future. Optimism is still not near the levels before the pandemic but the rebound from the 2nd quarter is significant. It appears that the necessity of changing normal operations forced businesses to adapt to the new environment and is giving them some increased feeling of control over their future.
We as Americans have a quality that provides hope and that is optimism about the future. It’s hard to see how and when this all plays out, but the American spirit can see through the muddle. Is our optimism another reason the stock market is rising to new highs?
Supposedly we have an efficient market meaning that all information is immediately reflected in market prices. There is a general truth in that framework, but within that efficiency markets rise and fall for reasons other than data. Sentiment is equally or more important. A contrarian investment strategy says that consensus beliefs are wrong; invest in the opposite of sentiment. Trying to figure all this out can give you a headache which is why we do not time the market and use inexpensive index securities to diversify.
As financial planners we believe our focus is client centric more than market centric. The market will do what it does regardless of what we do. Our experience says that our value is helping our clients create appropriate frameworks to make the best decisions possible. Part of the decision making is stress testing any decision against a negative outcome. It is important to have a plan B because it is challenging to get it right 100% of the time. In stress testing options, we recommend a strategy called “acting as if”. If you can artificially create a potential environment then implement it as a mechanism to safely see how it feels.
Act As If
The best example is a client that has a plan to purchase a home but the cash flow costs of that purchase are higher than their current housing costs. Our advice is take the difference between your current rental or housing costs and your projected mortgage costs and set those funds aside now, every month into a savings account automatically the same day your rent is due. Act as if the bigger payment were reality. See how this strategy of “act as if” affects your cash flow and lifestyle. In this way you can see the impact of a decision without putting yourself at risk. “Act as if'' is a way to keep you in the driver's seat and provide a sense of control when evaluating life’s options.
A common quote referenced when beginning a daily meditation habit: “if you don't have time to meditate for 5 minutes, then meditate for an hour.” Creating daily habits is hard, the less time we have to create beneficial habits, the more we usually need to spend the time on better habits. Anyone who has attempted a meditation practice is probably familiar with the term ‘monkey brain,’ the darting of thoughts we become aware of when we sit still. The monkey brain is characterized by an awareness of the massive continuous, onslaught of thoughts of future pressures and past mistakes, which work against us when we are present. Now in this time of suspended animation, why continue to have a million tabs open in our brains if we don’t need to? Managing how much and what specifically we take on are strategies that work to tame the monkey brain - an important element of a balanced life.
Another example of awareness is the human tendency towards acquiring and hanging onto worldly possessions, "just in case." Spending so much time at home has made us all more acutely aware of our things...and the excess! In evaluating her bedroom closet this past week, Monique talked herself out of buying a freestanding wardrobe to house excess clothing by getting rid of clothing and eliminating the need to store any of the excess in the first place: less to store, less to organize, and less to care for consistently. Resulting in more space and time back in return.
Fewer tabs open in our brain, less clutter in the closet, and fewer expectations of getting everything done in a day is worth meditating on by first growing aware of our tendencies and taking a moment to pause. Take financial planning, which concludes with a final plan result, is a process which improves and tracks the evolution of our ever-changing financial lives. Sometimes it’s hard to be patient with progress. Stumbling across messages like these are a helpful reminder to pause, even just once - it's not "all or nothing," but using our awareness to help us return to our daily practices.
Our team works hard to develop ideas and action items to help you make the best decisions possible. You are our teachers and the team thanks you for that. You create the material for the evolving process.