News & Views
Dazed and confused.
That’s probably how you are feeling right now as you watch the stock market rally while we continue to see some of the worst economic data since the Great Depression. On the surface, it would seem like a massive disconnect. We know things are bad, so why isn’t the market behaving as such? Because we knew it would be awful.
Markets on Lockdown: Sheltering in Your Plan
“The truth is, the next crisis won’t be caused by the same problem…It will likely come from something we are not watching or thinking about (although in hindsight, it will seem obvious). That’s what makes it a crisis.” -NPF Client Letter, January 2020
Market liquidity is like oxygen: you take it for granted when it is plentiful, but you absolutely notice it when it disappears. For the past twelve years, liquidity (except during a few occasions) has been ample – liquidity, by the way, represents an asset’s ability to be transformed into another (i.e. cash) without a loss. However, in moments of extreme panic, liquidity dries up quickly causing losses for market participants that have no other choice but to accept a lower price than fair value for an asset sale (namely, stocks and bonds).
As investors, we must accept that the financial markets can occasionally be a dangerous place. The only certainty we have is that the future will surprise us, as it is unpredictable. If it were predictable, you would not be rewarded for putting your hard-earned savings to use in investment assets.
Willingness to tolerate risk = Opportunity to be rewarded for investment