By Andre Shashaty
October, 28, 2014 – Do you remember the German family that defied gravity time and time again, putting as many as seven people at a time on a high wire? In 2013, Nik Wallenda walked 1,400 feet over the Little Colorado River Gorge in the Grand Canyon at a height of 1,500 feet on a wire just 2 inches thick. He did it without a harness or safety net.
That’s a lot like the investors driving the current short-term surge in stocks. They might survive and they might even make a financial killing if the uptrend continues. On the other hand, it could end very badly.
I don’t blame bullish investors for believing in the American economy and the long-term growth potential of companies like Twitter, Facebook and Amazon. We’d all like to believe the rosy scenario of the U.S. economy outpacing the world and the supposedly unlimited potential of the tech stocks. I’d also like to believe in Santa Claus.
The sharp drop in the major indexes in mid-October should not be dismissed as an aberration. It shows that powerful negative influences are definitely making their presence felt and are very likely to reassert themselves soon.
Even after the markets rebounded in late October, some analysts said it was temporary, as short sellers took the opportunity to buy up shares at lower prices.
The very recent big dips in Twitter and Amazon show that there are chinks in the armor of the optimists who believe that long-term growth potential trumps current financial performance and high valuations. It’s only a matter of time before people get impatient with the promise of profits which always remain in the future.
The disconnect between Wall Street and the economics of Main Street has never been greater. The ability of investors to deny the existence of massive global political instability and economic weakness is nothing short of astounding.
The world economy is threatened by a mediocre era of low growth for a long time, warned Christine Lagarde, managing director of the International Monetary Fund. The global economic recovery is “brittle, uneven and beset by risks,” she said.
The risks and impacts of Ebola and a new war in Iraq and Syria are not gone. Wall Street is just whistling past them.
Meanwhile, the prospect of rising interest rates has not gone away.
There’s no way to rationalize market behavior. Nor should you try. Just focus on finding the right balance between your desire for gain vs. your prudent fear of loss. Your moves now depend on your time horizon and your tolerance for risk.
But remember the basics of asset allocation and money management: Sell stocks and asset classes that have run up in value and buy those that have fallen and lock in profits to the extent that you will need cash in the next few years.