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“You know sometimes in life all you have is (messed up) and poisonous choices”. Its a line from the movie, American Hustle, I edited in the event my children read this. Jennifer Lawrence’s character Rosalyn Rosenfeld delivered the line flawlessly. The recent day’s market volatility could cause investors to think all they have left are messed up, poisonous choices.
Extreme volatility and massive market swings pre-empted by high frequency trading has made this the worst market in the last four years. Never before in history have we seen a handful of algorithms create such price fluctuations. Investors’ first seemingly messed up, poisonous choice is whether to endure the swings, or head for the door before everyone else does, at the risk of missing another major upside. They are motivated by an intolerable fear of missing out.
The second and equally messed up, poisonous choice is to re-allocate investments to a less volatile more diversified vehicle. In years past, this was the bond market. However, since the Fed has artificially suppressed bond prices through the use of monetary policy and effectively lowered interest rates to near zero, the bond market is an even more messed up, poisonous choice than the stock market. The removal of the bond market as a viable investment opportunity is a major contributor to high percentages of appreciation in the stock market.
A third messed up, poisonous choice is commodities. With the current and on going deflationary spiral that is the state of the commodities market, investors would be ill advised to try to call bottom at this point. When it falls too far, this is the worth while time for investors to take a look.
The choice that doesn’t fall into the messed up, poisonous category is real estate. Real estate is an illiquid investment when purchased outside of REITs. Thus far, high frequency traders have not found a way to profit from real estate volatility. The fact that it is not traded in the public market is positive as price fluctuations are the name of the trading game. Also real estate demand is at a historic and sustainable high, both for sovereign wealth funds and large pensions. Despite a recovery in real estate since 2008, there is still huge demand driven by extensive market depreciation. There is a also a desire among investors who view the public markets as being highly volatile and potentially manipulated. for “real” assets The vast majority of pension funds, sovereign wealth and endowments look to increase not decrease the percentage ownership of real estate.
The fact is, that most asset prices have been severely distorted due to Fed policy. The goal of investors should be not to just survive making messed up, poisonous choices, but to thrive in a “real” asset class. In an unreal market, its time to get real.
Jeffrey C. Sica is the President and Chief Investment Officer of Sica Wealth Management, LLC (“SWM”), an SEC registered investment adviser that maintains a principal place of business in the State of New Jersey. The information presented herein may not be suitable for all investors, and no portion of this commentary is to be construed as a solicitation to buy or sell a security, or the rendering of personalized investment, tax or legal advice. Past performance does not guarantee future results, as there can be no assurance the views and opinions expressed herein will come to pass. Investing involves risk, including the potential loss of principal. Please consult a financial professional prior to investing.