Hold Tight in this Financial Meltdown

US equity markets have officially erased their summer gains.  The Dow Jones Industrial Average is back in bear market territory, and the S&P 500 is on pace for its worst year-to-date start in recent history.  Adding insult to injury, rising US Treasury yields have pushed borrowing costs to seemingly unsustainable levels as mortgage rates in some markets are now above 7% from around 3% just months ago.

It feels like the financial system is about to break.

The fact is that we’ve been here before.  In many ways, today’s financial environment is similar to the one that played out during the height of the Global Financial Crisis in 2008. 

And I’m taken back to the early years of my career when our Chief Investment Officer held weekly calls for our advisors to help them navigate the market volatility.

If you’ll recall, at the time, Countrywide was handed over to Bank of America months earlier, while Lehman Brothers and Washington Mutual had just gone under.  Money markets had just “broken the buck”, AIG was getting bailed out, and Wachovia was pushed into the arms of its competitor for pennies on the dollar.

Fourteen years ago this week, the financial system was melting down in front of my very own eyes.

Understandably, our clients (and team of advisors), were panicking.  The floor was falling out from under many individuals’ retirement plans and overall financial well-being.  At the time, market participants and households alike were looking for simple answers to a challenging situation. 

Now, our weekly calls involved hundreds of investment professionals, and many of them felt like they needed to do something.  Some advisors wanted to implement exotic derivative strategies to stem the losses in client portfolios.  Others suggested buying specific stocks or sectors amidst the selloff.  And other advisors were doing everything they could to stop themselves from simply getting out of the markets altogether.

So, what was the advice from our Chief Investment Officer? 

Hold tight.

The advice offered then still holds merit today, and here’s why.

Why You Should Hold Tight

As the financial system was coming unglued in fall of 2008, few individuals knew what the path forward would look like.  Investors were desperately looking for a catalyst to drive financial assets higher, but a positive market narrative was nowhere to be found.  

The old rules of how the financial system should function in many ways no longer applied during that time. 

Even so, policymakers stepped in with creative approaches to undergird the financial system.  As you’ll recall, in October 2008, the US government introduced the Troubled Asset Relief Program (TARP) to prevent other financial institutions from failing. 

In November of the same year, the Federal Reserve launched a historic quantitative easing program aimed at buying up bad debt and restoring confidence in the financial system by showing that policymakers had “tools in the toolbox” to address the market dysfunction.  The central bank also introduced a number of measures to support global central banks that had been experiencing stresses in international markets.

By March 9, 2009, market participants were finally convinced that the right set of tools were in place to avoid any further catastrophic collapse in the financial system, and risk assets susbequently rallied. 

In the year that followed the March 2009 lows, the S&P 500 index would nearly double in value and then rise by around 600% through December of last year.

Now, there are some individuals whose investment experience was far worse than the broader market.  It was those individuals who got out of the markets in January 2009, waiting on the sidelines for an “all-clear” signal before putting their money back to work.

Keep Moving Forward

The point here is that when it seems like the world is crumbling around you and the path forward appears ambiguous, the best course of action may be to simply hold tight and keep moving forward. 

Indeed, three fundamental principles apply here when it comes to managing your finances in times of uncertainty:

  • Focus on what you can control
  • Try not to get caught up in the emotions of the day, and;
  • Stay in the present moment

What You Should Focus On

To the first point, there is only so much that we can control when it comes to managing our lives or our money.  During times like today, I’m often reminded of an illustration from Carl Richards over at the Behavior Gap.  It’s a Venn Diagram with two circles. 

In the left circle are the “things that matter.”  And in the right circle are the “things you can control.” 

When you bring the things that matter, and things you can control together, what you find is that there are only a few items in life that you should be focused on when the economy or markets are in decline. 

These areas should include reminding yourself of the long-term financial purpose that you’ve defined for your wealth, and the plan you’ve put in place to address times like these when the markets go south. 

These actions could include reevaluating your investment strategy to ensure that your holdings are aligned with your long-term goals.  It can also mean ensuring that you have a cash management strategy in place to avoid having to sell investments at an inopportune time.

Stay Objective

The next component to holding steady in times of uncertainty is to remain objective and avoid getting caught up in emotions when the markets are gyrating up and down.

Now, it’s been said that watching the stock market every day is like watching someone play with a yo-yo while riding up a moving escalator. 

You’re likely to feel a high degree of stress if you focus on the yo-yo rather than where the escalator is headed.

If you find yourself worried about the markets and glued to financial media desperately seeking out answers, now may be a good time to turn off the TV and go for a walk. 

There’s no better time than the present to remind yourself that over the long-term, financial markets have historically rallied after periods of extreme volatility.  Remember, the role of financial media often is to sell emotion and rarely to provide any meaningful advice.

And if you find yourself stressed and still looking for answers, now may also be a great time to reach out to your trusted advisor to get an objective opinion on your options.

Stay in the Present

Finally, it’s vital to stay present in uncertain times like these.  John Kabat-Zinn had a saying that “wherever you go, there you are.” What this means is that the one constant we have throughout our experience with money (or life in general) is how we deal with the present moment.

There’s nothing we can do about the past and very little we can do about future events outside of our control.

That’s why during these times of economic and market uncertainty, it’s essential to focus on what you need to do right now.  Not sure what to do?  Then go back to your financial plan and remind yourself what you need to do now to make your goals a reality.

Don’t have a plan?

Well, there’s no better time than the present moment to put one together.  Either way, avoiding rumination on past or upcoming financial decisions begins with staying focused on what needs to be done right now in the present.

Where to from Here?

Make no mistake, the events unfolding in financial markets today feel ominously similar to the events that took place fourteen years ago this week.  Equity markets at home and abroad seem to feel like they’re in some sort of freefall.  The US dollar’s strength is squeezing international financial markets while bond yields are heading relentlessly higher and stocks are moving lower.

And the key reason that markets are behaving the way they are today is mainly due to uncertainty around what appears to be a self-inflicted wound from policymakers: a desire to inflict pain in order to tame inflation expectations.

It’s scary out there, and it feels like things can only get much worse.

But here’s what’s key: we’re going to get through this market dislocation just like we did during the Global Financial Crisis, Savings and Loan Crisis, Energy Crisis of the ’70s, and so many other crises from the past.

The solution to today’s high government debt and experiment in money printing likely will require a solution that hasn’t been presented yet.

For now, policymakers appear to be out of tools that address historically high inflation while avoiding a crash in the economy and financial markets.

What history has shown, however, is that when it seems like it can’t get any worse and there’s seemingly no way out, a solution eventually finds a way, allowing risk assets to breathe a sigh of relief and rally higher.

Until then, hold tight.