Market jump scares: what gives investment professionals chills this Halloween

Ghosts and goblins aren’t what make investment professionals pull the covers up tightly, peering around for frights that feed their insomnia through long, dark and chilly nights this Halloween.

Nor is it the scary clown car, with the orange-hued jester king at the wheel, to the south that seems intent on driving the United States and the global economy into the abyss. (That fear, after all, is widely held by all but a minority of humans these days.)

For many investment professionals, it’s the monsters that lurk around the corners of the markets as days creep increasingly into darkness.

The dead may not be rising, but inflation, bond yields and interest rates are, says Jonathan Baird, editor of the Global Investment Letter and retired portfolio manager, based in Toronto.

“Interest rates are increasing not only in the United States but all over the world, and that puts a lot of pressure on the global economy.”

It’s a multi-creature feature involving global debt — from governments, corporations and consumers — whereby higher inflation conjures higher bond yields, compelling central bankers to raise their dreaded overnight interest rates.

The world right now is like that character in a slasher flick walking down the wrong dark corridor to a potentially bloody comeuppance. Already, the world is dripping red with global debt at a record US$365 trillion.

The leviathan continues to grow. Governments are running ultra-high deficits, and often for ominous reasons: building military arsenals, fearing that others nations are building theirs, too.

Corporations, particularly creepy big tech, are spending like maybe they believe there is no tomorrow.

The artificial intelligence arms race feels like a dystopian science fiction movie we’ve seen before. Big tech’s hundreds of billions in bond issuances is like protein powder for the inflation monster.

“If you want to go with the Halloween analogy, inflation is the villain in a horror movie,” says Tyler Mordy, chief investment officer with Forstrong Global Asset Management. “Everyone thinks it’s dead and then it sits up for another scare.”

Don’t expect a rerun of 2022 when rates went Godzilla, laying waste to the economy and then disappearing back into the ocean.

This time, inflation is more of a slow-burn chiller. The tension slowly ratcheting up until…

“Almost every economic expansion ends by inflation, central bankers raising interest rates, and then something breaks,” Mordy says.

We’ve heard many similar haunted stories: the 2008 Financial Crisis, the 2000 Dot-Com Bubble and the 1929 Great Crash.

Only today, we’re the potentially ill-fated characters, our finances in peril of being gored.

Certainly, ill omens are bubbling up in the markets.

“What keeps me up at night is market valuations and investors’ enthusiasm, which are both redlining,” says Hardev Bains, portfolio manager and president of Lionridge Capital Management Inc. in Winnipeg.

A bargain-hunter for publicly traded companies with strong business models trading at discounts to their intrinsic value, Bains says those well-priced, great companies are frightfully scarce in today’s overvalued market.

All the ingredients of potential doom are indeed simmering in the cauldron of capital markets.

Bains points to the ‘Buffett Indicator’: the total dollar value of the S&P 500 divided by the U.S.’s gross domestic product.

It is at or near all-time highs. In the past, a heightened Buffet Indicator number has been a harbinger of dark tidings.

Of course, you can’t predict when something wicked actually comes, Bains adds. But investors can exercise caution and exorcise some risks to their money.

“You don’t know what kind of catalyst is going to come along to bring a correction,” he adds, noting Lionridge portfolios hold about 20 per cent of capital in short-term fixed income.

Those help deal with market jump scares. As debt creeps higher, and markets become more and more a bacchanal party of gory and brazen greed, the greater the frisson investors feel when the bogeyman finally says … “Boo!”

“It’s a pretty safe bet that something will happen at some point with a deeply negative impact on markets,” Baird says.

He envisions the likelihood of a 1970s-style horror movie rerun of stagflation, reanimated for a new era of havoc.

For the uninitiated, stagflation is a witch’s brew of high inflation — driven by screechingly high energy costs — and a bloodletting in the economy followed by anemic growth.

“I’m surprised equity markets have held up as well as they have up to now,” Baird says.

Despite the risk of doom for their dollars, investors largely party on, indifferent to the warning signs. The ‘fear index’ — Cboe Volatility Index — is only a little elevated.

It seems we’re entranced by artificial intelligence’s (siren?) song of promised profitability, but will a jump scare usher the party toward a panicked stampede, sending investors’ capital to slaughter?

“Volatility is probably the scariest piece” of today’s macabre puzzle, says Grant White, investment adviser and portfolio manager with Endeavour Wealth Management with iA Private Wealth in Winnipeg.

Surging markets are the intoxicant. And falling markets often lead to fatal choices for capital, he adds.

“Certainly, the biggest risk is investors make ill-advised decisions based on a short-term drop,” he says. “Volatility is really good at scaring people out of markets when what they should do is stay the course and ignore the short-term noise.”

White adds that staying invested only works so long as investors have a well-devised plan suited to both short-term needs and long-term goals.

After all, intelligent foresight and planning are often how the archetypal main characters survive most terrifying tales, including those of market mayhem.

Happy Halloween!

Joel Schlesinger is a Winnipeg-based freelance journalist

joelschles@gmail.com