Today is Friday, November the first, and yesterday’s market selloff was almost 2%. Is this a precursor of the election that’s coming next week?
Thursday’s tech stock selloff wiped out all of October’s gains. In fact, it’s the worst selloff in over two months, but it’s hardly surprising to see a tech selloff given tech’s nosebleed-altitude valuations.
But so much of these nosebleed valuations are a result of AI, and AI is still very much an unknown quantity, especially in terms of how you monetize it. The thing to understand about markets, and we’ve talked about this before, is that they’re very much “expectations machines” and valuations hold steady if the expectations are met. So even if it’s a good outcome, if it’s not as good as anticipated, it will have a negative impact on the market.
The opposite is also true if expectations are negative, even if it’s less negative, not positive, that will have a good outcome in terms of markets. But markets in the short term are also static, they’re very noisy. And we know that because already today, Friday, Amazon is up on great news. The market has recovered 1% and it’s not even lunchtime yet.
The other thing we’ve talked about regularly is the role of elections in markets. Elections and markets are almost completely non-correlated. There are 100 reasons for markets to move, but election outcomes tend to be fairly forecastable. Now, this one is a tight one, and there may be a short-term bounce or dip depending on how it turns out. But the long-term challenges facing the next administration, regardless of who it is, is the uncontrollable spending that is almost impossible to cut in an atmosphere where the third rail of politics is to raise taxes.
That’s going to be a tough nut for anyone to crack and that is what the bond market is reacting to. A rising interest rate environment often is symptomatic of an expectation of a greater demand for money. And as long as the government is running a 6% deficit and talking about even more spending and or tax cuts, the markets are probably quite right to expect a greater demand for money in the future. That is why even despite short-term rate cuts by the Fed, we’re seeing long-term rates climb slowly. That’s hurting mortgages, making home ownership more expensive and hurting the entire construction industry.
Fortunately, the market is on the whole doing great – it’s running on all eight cylinders. And despite the slowly rising interest rates, there are a lot of good news. There’s a lot of good reasons to be optimistic about the next decade for the economy.
So given what I’ve just said, what do we do? Well, my prescription is if you’ve got a long-term plan, stick to it. That was the whole point of the “long-term” part. But be ready, that is, be psychologically ready, to take advantage of short-term jitters. Volatility is actually is a gift to asset allocators because in a volatile environment, investments either become overvalued or undervalued. In either direction, that’s a rebalancing opportunity. So keep your cool when everyone else loses theirs. We wish you the best of investment success and call me if you have any questions. Thank you.
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