So here we are again.  Loathe to comment for fear of legitimizing a non-event yet silence brings accusations of laxity.  Woe is us!

By now we’re all aware of a two-day slide that knocked 1,300 points off the Dow.  Big Media loves it.  Article after article.  Talking head after talking head.  Lots of folks rewriting history, telling us what to do, boldly telling us what comes next, etc.  Clicks and ratings equal big bucks.  Fear sells.

Politicians won’t be far behind.  Democrats will blame Trump’s tax cuts.  Republicans will blame The Fed.

Never let facts get in the way of a good story.

Here are some facts:

  • The short-term prices of financial assets are meaningless.  They are a measure of sentiment.  Nothing more.
  • Prices are a proxy.  They may indicate value but they say nothing about underlying fundamentals.  We’ve discussed it many times.  Here for example.

We’ve argued for quite some time that prices are decoupled from fundamentals.  A weak economy was overshadowed by skyrocketing equity prices.  The Fed forced down interest rates after the financial crisis and kept them too low for too long to keep us out of cash and bonds.  So-called risk assets such as stocks have had an extraordinary run since 2009 even as the real economy grew only moderately.

Tax reform and deregulation have unwound many of Obama’s policies (except for those “wildly successful” shovel-ready projects).  Ha!  The result?  The real economy’s anemic growth rate has surged to almost 4% while the unemployment rate is down to 3.7%.  The Fed in turn is raising short-term rates and winding down its bond buying (“Quantitative Easing”).  The rise in bond yields – a response to this faster growth – has traditionally meant that stock prices will fall as earnings are discounted at these higher rates.

So while the pundits are busy telling us what’s sure to happen here are some additional truths:

  • No one can answer with certainty how long any correction will last.  Will higher corporate earnings and faster economic growth lead stocks higher?  We’ll see.
  • No one knows where capital will flow.  Will higher rates chase money out of risky assets (i.e. growth stocks) towards more normalized allocations that include cash, bonds and value stocks?
  • No one knows how higher rates will impact the real economy.  If the wealth effect bolstered consumer confidence on the way up it may deteriorate on the way down.

It’s classic tortoise and the hare.  Investors with stock-heavy portfolios and those passively tracking the S&P 500 must accept 100% of the downside given they earn 100% of the upside whereas investors with balanced portfolios participate in the upside but survive the downside intact.

Slow and steady wins the race.  ALWAYS.

So what should anyone be doing during this bumpy ride?  At Apollo we continue to sing our favorite song.  Benchmarking to an arbitrary, unthinking, overly-concentrated index is a loser’s game.  Instead determine a required ROR and the maximum amount of risk needed to achieve it.  That’s the equity component.  Hold plenty of cash and fixed income for safety, income, security and smoothing out the ride.