The Market's Mood Has Changed... Here's What to Do
Editor's note: The market can turn unexpectedly...
As growth and speculation continue to propel stocks higher, many investors are throwing caution to the wind – pouring their money into the most lucrative opportunities they can find. But Retirement Millionaire editor Dr. David "Doc" Eifrig says if you're going "all in" on the bull market, you're setting your portfolio up for disaster...
According to Doc, whether you believe a downturn is right around the corner... or you think the market has more room to run... there will be plenty of volatility ahead. And if you know how to stay on the right side of the trend, you can maximize your gains – and be ready for any bumps along the way.
In today's Masters Series, a combination of the March issue of Retirement Millionaire and the August 4 DailyWealth, Doc explains what toilet paper can tell us about the financial markets... reveals why the market is back in "risk on" mode today... and details why stocks are overdue for a correction...
The Market's Mood Has Changed... Here's What to Do
It's a scene lots of us experienced last year...
Arist Mastorides had one last meeting at the office. Then he headed off to a work-from-home future.
It was March 2020, and many of us expected to be back at our desks in a couple weeks. But Mastorides had an early clue that something much more cataclysmic was happening...
On his way home that last day, Mastorides stopped at Walmart. He found the aisle that stocked his company's product empty... The shelves were completely barren. And he knew he had a lot of work to do.
Mastorides works for Kimberly-Clark (KMB). He's the president of the company's North American Family Care division. It's his responsibility to put the toilet paper on the shelf. And as everyone knows now, the toilet paper wasn't there.
Just the day before, sales had surged 734% over the previous year as panic-buying set in. And no one saw it coming...
The toilet-paper industry scrambled to refill shelves, but there wasn't much anyone could do. We all just had to watch our stockpiles dwindle and hope we could track down a few precious rolls before someone else snatched them up.
Kimberly-Clark and its competitors spent the pandemic with a product in high demand... that they couldn't sell fast enough... with upset customers... and with little to do about it.
When the COVID-19 run on toilet paper happened, the supply chain was caught unaware. For one, no one predicted that a pandemic would lead to toilet paper shortages (unless perhaps it was a global cholera outbreak). But more important, rising demand only meant shrinking supply.
So when toilet-paper sales soared 734%, Mastorides upped his machines to 99.8% capacity... But that was as far as he could go.
Big projects to raise production levels didn't make any sense. Demand for toilet paper was destined to collapse as people worked through their stockpiles. Then in the long term, it would settle right back to where it was before – 141 rolls of toilet paper, per person, per year.
In supply-chain management, this is known as the "bullwhip effect." When you give a small flick to a whip, the motion travels down the whole tool. By the time it hits the end, the result is a large snap.
In supply chains, a small change in consumer behavior leads retailers to place a bigger order with suppliers, which place bigger orders with their suppliers, which then place even bigger orders with their raw-materials providers, and so on. These little changes wreak havoc on supply chains.
The same thing happens in finance...
Financial markets are all just one system running in a perpetual cycle. The Fed keeps monetary policy easy, so investors have cash to buy stock. Rising stock prices lure in more investors. Index funds take in cash and are forced to buy more securities. But eventually, when the momentum slows – and even breaks down – the market can crash.
The Fed provides backstops to risk and eases financial conditions. But true breakdowns happen fast – and faster than they used to. We saw this in downturns in 2013, 2018, and 2020 that were brutal in their speed and depth, and then rapid in their recovery.
The point of all this is that the market (and the world) is a complex beast. If you try to run your portfolio right along the razor's edge, you have the potential for ruin. If you're optimizing your portfolio for maximum efficiency in euphoric "Melt Up" conditions, you'll be like Kimberly-Clark's toilet paper factory – helpless to do much about it when things change unexpectedly.
And things will change. That's why the trend is one of the most profitable things you can understand about the market...
Sometimes, traders are pouring their money into risky speculations. Other times, they're pulling that money out.
And by staying on the right side of these trends, you set yourself up for big gains.
Over the past month, the markets have wavered between "risk on" and "risk off" behavior...
Tech stocks and other particularly speculative names led the market higher for a couple years, then stalled out for the last couple quarters or so.
But the mood has changed... Speculation is in the air again. We know this because a few key areas of the market have all been soaring lately...
Look how the tech-heavy Nasdaq Composite Index has rocketed up through September...
And electric-car darling Tesla (TSLA) has popped off its May lows (though it's still well below its January highs, when it traded for an absurd 26 times sales)...
For now, growth and speculation looks like the order of the day. And as my colleague Steve Sjuggerud has noted many times, that's what you should expect in a market "Melt Up."
Folks are all hitting the "buy" button at the same time, causing stocks to rise... and the new highs attract new buyers. You'll often hear folks say that new highs lead to more new highs – and it's typically true. At least, it's true until there are no new buyers left.
This rally in growth and speculation tells me that there might be new highs ahead.
But it's important to stress that nothing goes in a straight line forever. Even if the markets end the year higher than where they are now, there will be plenty of bumps along the way.
We saw that on Monday, when the Dow Jones Industrial Average fell 600 points. The S&P 500 Index closed down 1.7%... its worst day since May.
We're overdue for a market correction. The S&P 500 Index has yet to fall by more than 5% since late last year. And as I always say, market corrections are just a normal part of the cycle.
So even though speculation is thick in the air – and it's tempting to go "all in" – always remember there are going to be periods of volatility as this Melt Up continues.
By all means, continue to speculate and profit. But do so safely. Never put all your eggs in one basket. There are still plenty of threats to this bull market... from high inflation readings to new coronavirus variants to high market valuations.
Enjoy this Melt Up... but don't get complacent.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig, MD, MBA
Editor's note: The bull market is running out of buyers – and Doc says if you're not taking steps to protect your savings, your portfolio could be in danger...
That's why on Tuesday, September 28, at 8 p.m. Eastern time, Doc is sitting down with his colleagues Steve Sjuggerud and Dan Ferris to offer their valuable insights on the stock market... what they believe is the biggest threat to your wealth today... and what you should be doing to prepare. Plus, if you reserve your spot today, you'll receive a bonus special report detailing seven of the world's most overvalued stocks. RSVP for free right here.