Volatility

The stock market has been pretty volatile recently—it seems like every day, it goes up or down by multiple percentage points. There are many reasons for the volatility—recession fears, corporate earnings, interest rate increases, stubborn inflation, wars abroad, supply chain issues, oil prices, corporate bankruptcies, etc. It seems like pessimism is ruling the markets with only a slight glimmer of optimism. Today, I’ll attempt to put all of these things in perspective. The most consistent cause of the volatility comes from our stubborn inflation and the Fed’s attempt to attack it with interest rate hikes. The problem with the Fed’s approach to inflation is that it is one-dimensional, fails to address all the forces causing inflation, and will result in economic turmoil. In other words, the Fed cannot single-handedly quell inflation even though they are acting as if they can. Imagine a dam operator who falls asleep during a rainstorm, allowing a dam to be filled beyond its capacity, which causes structural damage to the dam. Then imagine the dam operator merely letting water out of the spillway to fix all the problems he caused without calling someone to fix the cracks in the dam. This is what the Fed has done and what they are doing. The response to inflation needs to be a multi-pronged attack that includes interest rate hikes, deleveraging the government, incentivizing individual and corporate deleveraging, more immigration, tax reform, higher education, business-friendly policies, etc. I believe that our government leaders are inept and cannot assemble such a multi-directional response, which means that inflation, interest rate hikes, and volatility will likely be the norm in the immediate future. For novice investors, volatility is cause for fear, alarm, and brash decision-making. For the experienced investor, volatility is an opportunity. Some of the keys to investing in volatile markets are to (1) be patient, (2) don’t invest money you need to live on, and (3) look for deals. Happy investing! Ü