photo by spixpix
Written by Nathan White, Chief Investment Officer, Paragon Wealth Management
The much anticipated Greek elections this weekend promise to produce some potential market fireworks next week. It seems to be a toss-up as to what the outcome will be and even if the pro-Euro side wins and the market rallies significantly it could be very short-lived. Right now in the short-term bad news is good news for the market because it increases the odds that the central bankers will come to the rescue. Case in point - today the markets were tailing off mid-day until a rumors spread that central banks were planning coordinated action in response to what might happen in Greece over the weekend. The Dow immediately shot up about 200 points in minutes. Markets love their sugar!
Trying to predict what will happen to the markets in the face of all this uncertainty and volatility can be very hazardous. It can be very easy to make the bear case but then again so many are making the bear case and buying very expensive protection that perhaps the risks are priced in and any news to the contrary creates violent short squeezes. In the end the Europeans won’t willingly throw themselves off the cliff. However, they only move when the markets force them to and by continually dancing next to the cliff they run the very real risk of making a mistake and falling off. I could go on making the bull and the bear case as both sides have valid points that I agree with but in the end I don’t know how it will all play out.
So what’s an investor to do? In the long-run (which is what investing is) these short-term “events” won’t even matter. Markets recover as they always have. However, these headline events stir people’s emotions and then mistakes are made – something I have talked about in length in previous writings.
We have been raising cash in our portfolios to take advantage of the possible volatility events created by the European crisis. I look at volatility as an opportunity rather than a risk. Any sell-off based upon a Greek or Spanish meltdown would probably tend to be violent and short-lived and force the final endgame of the European mess. As equities are already cheap they would become absolute bargains and this could be a great opportunity and therefore we feel it is prudent to have some dry powder! However, as stocks are already cheap and pessimism abounds markets could already have priced in the risks and the central bankers could act before a meltdown causing the markets to move higher. For this reason were are still 75% to 90% invested across our various portfolios/models. This way if markets move up we will participate and if they move down we have money ready to be put to use. Seems to be the best trade-off at the present time.
Over the horizon the elections and “fiscal cliff” worries promise another possible round or “opportunity” or volatility...