With Risk Rising, Why Not Sell It All?


Over the past few weeks, I’ve expressed more and more concern about rising risks for the market.

I’ve been worried about North Korea’s rapidly advancing nuclear and missile program—and not just for the impact it might have on share prices—and I’m skeptical the current president has the political and diplomatic skills to deal with it.

I’ve also noted the busy legislative calendar in Washington, D.C., with a new budget, a potential government shutdown and possible clash over raising the debt limit on the horizon. (This week, President Trump made a surprise deal with Democratic Senate Minority Leader Chuck Schumer and House Minority Leader Nancy Pelosi to extend the debt ceiling until December and throw in some aid for victims of Hurricane Harvey in Texas and Louisiana.)

Meanwhile, Wall Street seems mesmerized by the prospect of tax reform, which looks extremely unlikely this year.

We laid out the whole case in a special alert to paid subscribers last week, which recommended specific actions.

But if risk is rising, why stay in the market at all?

First of all, the fundamentals still look pretty good, even 8 ½ years into a bull market. The Federal Reserve hasn’t raised rates much at all (the federal funds rate is barely above 1%–the low point to which former chair Alan Greenspan pushed it in 2003-4), and earnings growth continues strong.

Second, the economy is in decent shape, growing at 2% or more a year. Late last month The Wall Street Journal reported that for the first time in a decade, global economies are growing in sync. Unemployment is near cycle lows, and employment growth is good. Inflation remains subdued. What’s not to like?

Third, the nature of risk is that bad things only may happen, and taking risk is part of investing—and life. If all you wanted to do was guard against risk, you’d be 100% in T-bills or you’d keep all your money in the mattress. And then the worst may not happen, anyway.

Finally, I feel fear and greed as much as anyone else, so I could be swayed by those primal emotions and turn out to be wrong.

That’s why when I get nervous about markets, as I am now, and don’t see the euphoria we had in 1999-2000, I recommend reducing risk, not eliminating it, by lowering your equity exposure a bit. So, if I’m wrong or early and the market continues to rally, you and I will continue to profit.

When risk is rising, it’s prudent to get more defensive—but not abandon stocks entirely. It’s not a black-or-white, all-or-nothing world.