It’s become the epitome of cliché to make a comment such as "the only constant is change."
Cliché is something writers try hard to avoid. Yet there’s no denying that this Heraclitus principle applies to life at large. And particularly to life in the financial markets.
Before we go on, I think I had better remind readers of their college days in Greek Philosophy 101. That’s when you learned about the pre-Socratic Greek philosopher from Ephesus named Heraclitus.
To Heraclitus, the doctrine of change is central to the universe. He expressed that in the following poetic way:
No man ever steps in the same river twice, for it’s not the same river and he’s not the same man.
When it comes to markets, business and, really, all things in life … never has a truer statement been made.
Think about this concept as it applies to investing. Sure, we can approach markets with a set of precepts, strategies, tactics and a sense of history.
Yet all of that can come up short. Despite our best and most well-intentioned efforts.
In fact, you can get just about everything "right" when it comes to making a decision and placing your wager.
But then you can still get blindsided by a river of constant flux.
|Image credit: wikipedia|
This situation seems particularly applicable to the equity markets since Election Day.
By now, we all know that the main driver of stock prices since the Trump victory has been hope. The hope of pro-growth economic policies like deregulation, infrastructure spending, healthcare reform and tax cuts.
So far, the only real thing that’s happened is some deregulation.
Sure, the House voted to repeal and replace Obamacare. But now the legislation is in the hands of the Senate. There, it will undoubtedly go about a transformation that, yet again, reminds us of Heraclitus.
Don’t look for any bill from the Senate to look much like the House version. In fact, it’s questionable whether any type of healthcare reform bill will even come out of the Senate.
As for tax reform, well, that’s another market hope that’s likely to be struck by Heraclitus.
Most Republicans want to lower taxes. But many don’t want to do it without some provisions that make a tax cut revenue-neutral.
Moreover, there are virtually no Democrats on board with anything President Trump puts forward. So already you have built-in gridlock. And it can stymie even the most-ardent bull run.
This current policy flux is likely what’s caused stocks to basically go to sleep over the past several weeks.
Yesterday, a friend pointed out that we’ve seen a prolonged period of about 10 weeks where the CBOE Volatility Index (VIX) has traded near its all-time lows.
The current prolonged lack of volatility has some market pundits calling for a spike in that VIX. And, as such, an impending decline in stocks.
Yet history tells us that the VIX can stay low for a very long time without seeing a big spike higher … or a big decline in equity prices.
This same friend also reminded me that we are not even close to the record for low-volatility stretches. In ’92 to ’93, we saw ultra-low volatility last for 179 days.
In ’95 to ’96, low volatility lasted some 254 days. The current bout of low volatility has only lasted about 80 days.
The point here is that stocks can bounce around in a period of relatively little real flux. Just because there’s a historically low level of one component in the markets, doesn’t mean a return to the mean is coming anytime soon.
Indeed, change is like that in life.
It always happens, you can count on that. Yet it often happens when we least expect it.
In my view, a person’s ability to deal with that change graciously, intelligently and wisely is going to go a long way toward determining their success — and ultimately their happiness — in life.
So, thank you, Heraclitus. May your wisdom bring comfort to us all.
Good luck and happy investing,
Uncommon Wisdom Daily