Friday File: Panic! … or maybe Don’t Panic!

What am I thinking after this week's jolt ... and what are the buys and sells in the Real Money Portfolio?

By Travis Johnson, Stock Gumshoe, October 12, 2018


If you’re wondering whether it’s interest rates or just “worry about overvaluation or growth” that’s making the stock market go crazy this week, or whether it’s the trade war or political upheaval or something else, well, join the club. There’s some indication that traders are in fear of the “slowdown” that could be caused by the Fed’s rate hikes extending out into next year, but, really, it doesn’t matter, you don’t have to choose… and you’ll never actually know.

Remember Dagwood and Blondie? They’re still around, and I rarely go to that particular strip for wisdom, but this one is worth reading again:

That particular strip was published in the 1970s, by the way… some things are eternal, and one of them is that WE DON’T KNOW why complex systems change quickly. People are strange beings driven by emotion and story, and sentiment changes that send stocks to stratospheric valuations or crush them without specific reason are fairly common and incredibly hard to predict. It’s hard to predict when a horde of lemmings or wildebeest will turn direction, too.

And when it comes to whether we should fear interest rates, remember that what matters most to the market on any given day is determined by what story is in fashion — like hemlines, market narratives change over the months and years. If recent commentary from the Fed about growth being strong and the likelihood for more rate hikes being necessary had come a couple years ago, it would have decimated income stocks like REITs and utilities… as would the sharp rise in the 10-year note that we saw a couple weeks ago. Instead, what happened? Here’s a chart with REITs and utilities and the S&P 500 over the past two weeks — utilities held their ground, and REITs did as well as the S&P 500:

VNQ data by YCharts

To be fair, those “income” sectors did diverge a bit from the S&P starting in January this year, and REITs are underperforming on the year, particularly thanks to weakness over the past six weeks, but the immediate reactions are not always what you might have expected if you were still following the fashionable narratives of years past. Here’s what those three look like year to date, just FYI:

VNQ Total Return Price data by YCharts

So be careful about making assumptions ...

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