Yoshikami: Thursday's Plunge – Your Wake-up Call
Wasn’t it just two weeks ago that we were inundated with stories of a V-shaped recovery and a Goldilocks scenario of a soft landing for the U.S. economy – not too hot, not too cold?
The markets go up every week, right?
The good old days are right around the corner the ultra bulls cried.
Well; maybe not.
In my view, certainly not.
And Thursday's roller coaster market ride underscored that we are not out of the woods yet. Yes, the sunlight is piercing through but its still pretty dark. Issues remain that won't be easily solved.
So what happened yesterday?
It was a perfect storm (to say the least). There was a crisis in Greece complete with violence, a very anxious and nervous market, and maybe a trading glitch/error/anomaly that resulted in a plunge downward.
This is how markets behave when fundamentals are still weak; anything can trigger a major panic.
It doesn't really matter if the massive spike down mid-session on Thursday was an error or not. Regardless of the breath-taking ten-minute plunge and recovery, the market was still reacting negatively to the heightened crisis in Europe ending the trading day down 3.2 percent.
In a conversation I had with David Faber on CNBC's special coverage yesterday, he used the term "bifurcated market"; a perfect summary. Yes, there was a technology issue mid-day, but there was also a reaction to real concerns. Almost nothing was spared. The sell risk attitude was widespread with the VIX index hitting its highest level in 12 months. (You can see the entire interview here.)
It was pretty wild out there.
But instead of chalking this up as simply panic in the market, we should see it as a huge wake up call.
All is not well.
Yes; its better but not well and your investment strategy should reflect this. More than ever, it is important to hold on to a rational view when we examine the challenges facing global economies.
DO NOT ASSUME ALL IS WELL.
There are still problems no matter what euphoric prognosticators say.
The drama in Europe continues to be the dominant driver of capital markets and that will continue until clarity arrives on how policymakers will resolve their issues.
The unemployment rate in the U.S. is still high and hit 9.9% today.
Banks are still de-leveraging. China, the global engine of growth, is tightening its lending standards. Global economies are sputtering forward rather than roaring ahead and the psychology of consumers is still fragile.
So, what’s next for the market?
In the short term, we are heading towards more volatility; that's obvious. But here's a news flash; the volatility could be down as well as up. Expect the markets to continue to price in the risk of a worsening global liquidity crisis.
Still, for investors it is not the time to run and hide.
Don't be frozen; you must act. Be tactical and adjust your strategy based on current conditions. Hold some gold, short-term fixed income, and a diversified pool of cash flow oriented equity assets. Take advantage of the opportunities provided with this recent downturn to buy up assets that you think hold long-term opportunities. Don’t forget to take positions in commodities to hedge against inflation.
Top that all off with a healthy dose of paranoia.
Remember that just when it seems safe out there, with everyone telling you there's nothing to worry about, it's probably the time to be most concerned. You don’t want to be caught asleep at the wheel as the highway crumbles before you. Be flexible. Invest with a healthy dose of skepticism. Be tactical when others panic and be cautious when others rest easy.
That's the way to navigate the world we live in today.
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Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top 100 investment advisors in the United States for 2009 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at firstname.lastname@example.org.