Fast & Slow Events

| April 28, 2023

Some market events happen slowly while others come from out of nowhere. The failure to distinguish between the two can destroy our plans.

The Covid pandemic is an example of a sudden event that cannot be anticipated. The same is true of Russia’s invasion of Ukraine. In both cases, investors found themselves drowning under a deluge of information, much of which has turned out to be mistaken. We would not be human if we failed to feel a compelling need to act in the face of these unanticipated disasters. Yet, we know in hindsight that people who made sudden and emotional changes to their plans hurt themselves badly. Big changes in market prices, which often differ from the value of investments, provide opportunity. Rather than trying to predict the future following the jolts, all that we should do is rebalance our investments to maintain the appropriate allocations for our plans. When panicked investors sell their volatile investments to move into low-volatility securities, rebalancing allows us to do the opposite without engaging in the fruitless practice of market timing. Rebalancing also helps us to overcome our emotions.

Sometimes though, market changes happen very slowly, often too slowly for investors to perceive that a change is occurring. The Great Recession happened like that. Our federal government simultaneously encouraged widespread homeownership and the deregulation of banking. Ultimately, an edifice that took a decade or more to build came crashing down. Unlike Covid or Ukraine, we had a lot of time to prepare for the housing crash. The collapse of England’s Northern Rock Bank in September 2007 started the slow-motion implosion of the international banking systems of the West. Still, there was plenty of time to act.

While I am not predicting a similar collapse, I do see some cracks developing. Delinquency rates on consumer loans have been steadily rising for six months.* Delinquency rates on credit cards have also been rising. High rates will continue to put pressure on consumers and on certain types of companies.** Junk bonds and junk loans are particularly vulnerable right now. High rates mean higher costs for borrowers. These higher costs lead to credit downgrades, which mean even higher costs. Some companies that are not junk may become junk. Mark Maurer of The Wall Street Journal points out that “default rates for low-rated U.S. companies will likely hit 5.4% in February 2024, up from 2.5% in February 2023 and higher than the long-term average of 4.7%.” ***

I am not predicting another Great Recession or even a bear market, but I believe that we are in one of those slow-motion paradigm shifts that require vigilance. Many of you have surely noticed the changes that we are making to your portfolios. We will continue to do our best to avoid credit risk and be positioned to take advantage of selloffs should they happen as the year unfolds.

* Delinquency Rate on Consumer Loans, All Commercial Banks (DRCLACBS) | FRED | St. Louis Fed (
** Delinquency Rate on Credit Card Loans, Banks Ranked 1st to 100th Largest in Size by Assets (DRCCLT100S) | FRED | St. Louis Fed (

*** Maurer, M. "More Junk-Rated Companies Are Facing Credit Downgrades and Defaults". The Wall Street Journal, Online | CFO Journal, April 13, 2023.