Breadth Thrusts & Bread Crusts: Adapting to the Unexpected

JC Parets
June 23, 2022

From the desk of Willie Delwiche.

Monday was an unexpected break. Markets were closed for Juneteenth Day, which is now a Federal holiday. I didn't realize that would be the case until the middle of last week. It has made for a short week in the market after a long weekend for doing whatever it is you do to get refreshed after staring at computer screens all day. For me, it meant more time in the garden.

The garden has provided its own share of unexpected developments recently, and I’m not just talking about volunteer cantaloupes (though there are several of them around).

In the pond, a spike in ammonia levels necessitated an overdue and unexpectedly extensive cleaning. Not only is it now a healthier environment in which the fish can thrive, but in the process we discovered a baby fish that we hadn't known about.

Over in the dill patch, we had a hatching of caterpillars (Black Swallowtail). I saw one in the morning and by late afternoon, there were over a dozen. After checking with my biologist/naturalist sister, I collected a few for myself to watch as they grow and ultimately transform into butterflies. Speaking of adapting to the unexpected - these caterpillars have no idea what is in store for them.

Surprises are the norm in life - being able to adapt and adjust to the unexpected can be the difference between a positive outlook and repeated frustration, between success and failure.

Take the Fed for example. It had expected inflation to be transitory. When this turned out not to be the case, the Fed adapted. It's still catching up but it is now vigorously raising rates (the 75 basis point hike last week, for example) and it plans to continue to do so until inflation shows signs of moderating. How it handles its inflation-fighting intentions in the face of unexpectedly weak growth (Fed forecasts imply expectations of real GDP growth of 4% in the second half of this year) may be the Fed’s next opportunity to adapt.

For investors, this year has been one of unexpected volatility and unexpected market weakness. 2022 is racking up 1% daily moves on the S&P 500 at twice the pace of last year and one fastest rates in the past 2+ decades (on par with 2020 and right in between 2008 and 2009). With the Fed raising rates to fight inflation, stocks and bonds are moving lower in tandem. This unexpected development has many portfolios experiencing significant drawdowns and one of the worst first halves of a year on record.  

Some investors are adapting to this reality by burying their head in the sand. Others are allowing it to affect their mood but not their actions. 

A small minority are taking action. However unexpected it may have been, they recognize the reality for what it is and want to get in harmony with it. 

I'll close with a nautical framing: When there are accidents at sea, ships don't usually sink. However unexpected it might be, the reality is that  sometimes they do go down. If the ship isn't sinking, jumping overboard is a bad move. If it is sinking, staying put is catastrophic.

We don't know the future. We can develop expectations and take some action, but must be willing to adapt when the unexpected inevitably happens.

 

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