Is It A Blip Or A Trend?

These words were made famous in a commercial for the Washington Post featuring Craig "the Chief" Berube and Kevin "the Killer" Kaminski. The commercial shows these two Washington Capital hockey players, known for their physical play, discussing crime in America as an analogy for hockey.

Berube: Criminologist ponder national crime rates. Crime rates are down across the board, some dramatically and the question has become: Is this a blip or a trend?

Kaminski: Well, Bennet’s column said that crime in America presented statistics that conclude the more aggressive incarcerations and stricter sentencing appear to be turning around an archaic penal system.

Berube: Well, I say don’t do the crime if you can’t do the time.

Craig Berube askes the quintessential question of any analyst. Is this a blip or a trend? This is a great question to ask yourself when following an individual stock or the market as a whole. For instance, falling interest rates are a trend. Since 2007, the FRB (Federal Reserve Board) has been dropping interest rates in an attempt to stimulate economic activity and jump start the economy. Although this practice artificially propped up the economy and the stock market for that matter, there will come a day, and probably soon, when rates will rise and the market will make a major correction. Now, are the rate hikes a blip or a trend? Is the coming correction a blip or a trend? Two great questions to ask yourself going forward.

My bet is that the market correction we are headed for will be a trend. I believe this trend will continue for a longer period of time if the current political party losses control of the White House. I tend to think that the FRB is keeping the rates low for two reasons. First, the economy is not doing as well as the current administration wants you to believe and second, it is propping up not just the economy, but also the Democratic candidate’s chances to win in November. I believe if the 

Republican candidate wins in November you will see a series of rate hikes beginning in December.

Only a few times in the past have I moved to a majority cash position in any of my accounts. However, based on the political winds and the continued reluctance of the FRB to slowly introduce rate hikes, I believe that the next eighteen months will be more volatile than it has been. I also believe that if you move to cash now, there will be some fantastic bargains in the weeks and months to come. 

Often times it is the average investor who misses out on these bargains because, by the time Wall 

Street has made its moves the little guy is reacting to the market correction. Unfortunately, this leaves the little guy in no position to take advantage of the bargains created in a down market.

Blips are nice, but very hard to time. Trends will hurt you if you are fully invested. However, they create some of the best opportunities for bargain hunters who position themselves to jump at the opportune time. In my book, Simple Wealth Building Strategies, I devote an entire chapter to this concept of positioning. Blips and trends have a way of providing opportunity, but I believe that you have a part to play in the process. There are three ways opportunity is created. Opportunity comes from a change in the environment (for you), a change in your actions (by you), or a change in you (of you).

Opportunity is created for you when situations outside of your control present a favorable environment in which you can build wealth. Market blips create micro-opportunities such as a rise in stock prices due to favorable news or a drop in stock prices due to unfavorable news. I have bought into stock splits, mergers, conversions, and special dividend announcements. I have also bought into market adjustments such as the reaction to the Brexit vote. More often than not, these are quick blips which can pay big bonuses. Buying into opportunities that are created for you can be difficult because you have to constantly look for and research the details. But there are other ways opportunity is created.

Market trends create macro-opportunities such as the geo-political events that traumatized Europe during the financial crisis in Greece. Long term problems in foreign countries can have a suffocating effect on our markets, but domestic events can also open up the window of opportunity. Consider the effects of Y2K, 9-11, or the housing bubble popping. All domestic, all devastating to the market and all producing great opportunity for those who were positioned to pounce. All of these external events that provided the average investor with the opportunity to get some bargains.

Opportunity is also created by you when you take specific purposeful actions that produce a favorable environment for building wealth. This is the one where most people struggle because changing a poor financial behavior is hard. Having the cash available to take advantage of opportunity is, in and of itself, creating opportunity. To have the cash to make a move, one needs to preserve as much operating capital as possible. This means living paycheck to paycheck is not a good wealth building strategy. Changing that behavior alone can drastically change the opportunity you create for yourself.

Living on a budget, having an emergency fund, and preserving as much wealth as possible by using tax-favored accounts can go a long way in creating opportunity. However, the average person can struggle with getting even one of these right. That is why I wrote Simple Wealth Building Strategies. I walk you through a logical implementation of strategies that will strengthen your ability to build wealth and create opportunity for yourself.

Finally, opportunity is created of you when the depth and width and breadth of your character produces a favorable environment for building wealth. Others are more willing to share information with someone they trust, respect, and with whom they have a relationship. Your character produces opportunity and the lack thereof reduces it. Be the kind of person that abides by the rules, carries him or herself well, and speaks intelligently and thoughtfully about the more difficult issues facing our world today. Don’t be proud, don’t be haughty, and don’t be unwilling to help others even when there is nothing in it for you. You don’t want to be known as a blip; you want to be known as a trend and a trend setter.

Blips, trends, and opportunity are cousins. They play together. If you can learn how to read the market, you can position yourself to capitalize on blips and trends. I, personally, have begun to move towards cash in hand. I believe that once the election is over, the FRB will begin the process of raising interest rates. I expect to see a full percent by EOY 2017. They will most likely start with a quarter percent in December, followed by another quarter percent within six months and, if the economy can adsorb that, a half point by the end of 2017. It depends on the reaction of the economy, but I can see the FRB doing this especially if the Republican candidate wins. After all, the current Chairperson was a Democratic appointee.

DISCLAIMER: Opinions and statements made in this column are not meant to be used as financial planning advice. Also confer with your financial planner before making decisions about your investment. The author is not responsible for any decisions made by others based on the opinions and statements made in this column.