I shall follow up with my posts on the labor market soon, but right now I want to comment on recurring volatility by quoting Warren Buffet. In 1973, he told the Sunday Journal and Star of Lincoln, Nebraska that “in the short run the stock market acts like a voting machine while functioning in the long run more like a weighing machine.” * I do not know why Warren Buffet and his mentor Benjamin Graham called a scale a “weighing machine,” but the point remains valid.
Right now, everybody “knows” that there is a big recession coming. Because of that possibility, we shortened the bond maturities and increased the overall credit quality in our models months ago. Despite the arguments over whether or not we are in a recession, we have not seen the kind of increases in the yields on lower-quality bonds that one would expect from a real downturn. Should that happen, we are reasonably prepared to take advantage of any opportunity that arises.
Until then, we cannot “know” that there will be a liquidity crisis of the magnitude we experienced in 2008/2009 or the spring of 2020. We did not believe in the recent rally, but eventually, a rally will emerge that is not a “head fake” like this last one. We cannot pick a bottom, nobody can. What we do hope to do at some point is to return to a normal allocation at better prices. My hope is that we will be able to pick up some good bonds. Only time will tell.
In any case, prices and yields today are way better than we are accustomed to for those with a time horizon of at least five years. By that time, the markets should return to being scales instead of voting machines. Until then, we need to make sure that our allocations are suitable for our financial plans and that we have enough cash flow to meet our living expenses.
* Buffet, W. Sunday Journal and Star, 1973. https://quoteinvestigator.com/2020/01/09/market/. Accessed on 09.09.2022.