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Slept Through It?

By Terry Savage on January 08, 2020

The financial world is moving so quickly these days that you might have slept through the latest market shock.

Remember the story of the little boy who cried wolf? After a while, no one believed him. They stopped responding to his cries. And then the real wolf came and devoured him. Now, change the wolf to a bear. Eventually, it will be real.
The financial markets have become increasingly volatile, perhaps as a result of 24 hour instant trading opportunities and news dissemination. Contributing to the volatility is a growing distrust in the ability of leaders around the world to make rational decisions in a framework that has kept the world relatively safe for the last 75 years.

Overnight the world changed last week, sending a deep shiver through global markets. You may have slept through it, but the stock markets around the world, the gold market, and the oil market reacted dramatically in late night trading after Iran sent missiles toward U.S. air bases.

The political opinions of the cable pundits regarding the hostilities depend on your choice of news sources. But the financial markets are the place where money puts its mouth – and quickly. Investors were reminded that the financial world is very active on a 24-hour basis, even when U.S. markets are closed.

Not only did Asian and European stock markets face a sharp decline while we slept, but the U.S. stock futures markets that trade around the clock registered a likely 400 point decline at the opening the next morning. The oil market, which would be dramatically impacted by hostilities in the Middle East, was a better barometer of fear. Crude oil prices soared to a high of $71.75 a barrel – up from an October low of $56 a barrel. And overnight gold made a 7-year high, trading at $1603/ounce.

Fortunately, there were no casualties from the missiles, so the markets heaved a sigh of relief. Stocks opened about unchanged in the morning. Oil slid back to $62 a barrel, and gold retreated $20 from its highs. And that was just in the span of 18 hours!

And you slept through it. And the next morning the stock market reached new highs!

The world is awash in liquidity, created by central banks over the past decade as they desperately tried to keep global economies from circling the drain. That liquidity sloshes from market to market, seeking a safe haven and a good return. For a decade, the best return has been the U.S. stock market. The alternatives have been few.

Widespread negative interest rates in Europe mean depositors literally were paying the banks for safety. With global oil in an oversupply situation, there were few profits to be made. And even gold famously doesn’t pay interest. So money poured into the United States. The low interest rates that have frustrated savers here were a magnet to global cash. And the U.S. stock market soared on the money flow. It happened again after the latest crisis.

Now, the question is whether the U.S. dollar is becoming a more risky investment in these volatile times. As Americans, we don’t have much choice. We shop in dollars, invest using dollars, and plan our retirement in dollars. And since the last round of inflation in 1980, we haven’t been required to give much thought about what our dollars will be worth in the future. Maybe, now it’s time to hedge that bet.

Over the long run, we must all believe in the future of America. We must remember that there has never been a 20-year period where you would have lost money in a diversified portfolio of American stocks (such as the S&P 500 stock index).
But how long is your run? If you’re planning to spend down your IRA or 40l(k) plan in retirement, your time horizon is far shorter.

Bear markets lose on average 33.5 percent from top to bottom, but several have declined nearly 50 percent –including the most recent bear that started in 2008. And, significantly, the average time to fully recover is 4.5 years!

Remember the little boy who cried “bear” and no one believed him. Then the bear came and devoured him. It can happen overnight. In fact, it almost just did. And that’s The Savage Truth.

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