If you read my last article, you would already know that I thought market volatility would increase in October. Well, it’s happening and now is not the time to panic. Now is the time to take advantage of opportunities that will increase the overall performance of your portfolio over the long term. If there was never volatility, there would never be opportunity to invest in quality companies at discounted prices.
For patient investors, market volatility is your friend. For investors who tend to overreact to these big moves in the market, the chances of making bad investment decisions increases dramatically. If I have learned one thing over the last 20 years of investing, it’s that there are two emotions that affect the market and that would be fear and greed. I have definitely noticed that some investors have become fearful lately. Most of this fear is due to the upcoming election and the uncertainty of who will become our next President. I agree that this is definitely something we should be concerned about. However, I will also tell you that policy changes do not happen overnight so do not panic. There is a reason the United States government has three branches. It’s to make sure that no one person can alter public policy overnight. It can take years to change policy to the point that it will affect corporate earnings and the economy. I think the concern that investors should have on their minds has to do with interest rates.
Interest rates will rise at some point in the future. To me, this is far more important to the overall direction of the market than who will become our next President. The Federal Reserve directly affects markets through monetary policy. As rates go down, money becomes more accessible to the consumer. As rates rise, money becomes tight and this is negative for the economy. So the question I would pose to the individual investor is what is your strategy going to be when interest rates eventually go up? I will tell you that investing during a rising interest rate environment can be very difficult. You need to identify industry groups that will benefit during a period rising rates.
The first and most obvious industry to benefit from rising rates would be financials. As interest rates rise, financial companies tend to benefit from the margin spread associated with rates on the long end of the yield curve moving higher faster than the short end. Rising rates are an indicator of an improving economy as well so believe it or not consumer discretionary stocks tend to outperform as well. This is not a foolproof way to go about choosing investments, so consulting a qualified investment advisor is always a good idea.
At Fogel Capital, we research industry groups and individual investments everyday looking for the next opportunity.