Asking The Important Questions

Two-and-a-half years ago the Federal Reserve started what became one of its steepest tightening cycles in history. Two-and-a-half years and we are still debating whether the US economy, and possibly the global economy in extension, might be heading into economic recession.

Weak manufacturing and a deteriorating US jobs market are weighing on investor sentiment at the same time as record new highs for equity indices and the seasonally treacherous September-October period combine. It’s almost a guarantee for a spike in day-to-day volatility.

Can this get ugly? Of course, it can. Short-term market movements are equally determined by market specific characteristics such as concentration in popular stocks and technical trading. Investor sentiment under most circumstances is closely linked to how share prices and markets are performing.

By definition this also implies any bump in the road leads to sharper price moves, given many shares are trading on high multiples, and sharper price moves tend to impact on sentiment broadly. In simple market parlance: more selling begets more selling begets more selling. Before we truly understand what is happening we might be witnessing a new trend in the opposite direction.

As investors, how we prepare and respond to this risk depends on a few crucial factors:

-what kind of investor are we?
-what’s our specific strategy and horizon?
-what kind of assets do we own?

Almost thirty years of actively covering and monitoring financial markets have taught me more than a few invaluable lessons. One of such lessons is: there’s no such thing as a one-size-fits-all approach for investing in the share market. If we eliminate the level of experience everyone brings to the table, then those three key ingredients should guide us through the rest of the calendar year, and beyond.

But first of all, let’s start with that all-important question that is weighing on general sentiment: economic recession, yes or no?

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