Exogenous Events
How Do Investors React to Exogenous Events?
To begin with, such events are unpredictable, so trying to prepare for an exogenous event is a fool’s errand. Was anyone prepared for the attack on Pearl Harbor on December 7, 1941? How about the oil embargo in the 4thquarter of 1973 and 1stquarter of 1974? The Russian Coup? The 9/11 attacks? Hurricanes Katrina and Wilma? The COVID pandemic? And now the “Epic Fury” attacks on Iran? If you say that you predicted them, did you predict the exact day, time and location? I doubt it. Even the Nostradamus Prophecies are open ended and are explained retroactively.
So, really the way we react to exogenous events is first and foremost, not to panic. Then you may want to raise above average cash levels and wait for the market reaction to play itself out. I’ve done so. Also look for short-term trading opportunities. Once the market turns higher, you can revert to investing in longer term opportunities.
During the COVID pandemic, with people staying at home, stocks like Zoom (ZM), Peloton (PTON) and Docusign (DOCU) were excellent trading opportunities. All good trading opportunities come to an end as they did for ZM, PTON and DOCU by the end of 2021.
What happens after a War?
There is a significant amount of data which points to how stocks react to wars in the long term – 3-month, 6-month and 12-months - after the initial event occurs. So, just hang tight. I expect that Epic Fury will conclude in the next few weeks. Maybe we head lower until then, if technicals break down. Maybe we had a washout this week. Nobody will ring a bell when we hit a bottom but here is what typically happens (in no particular order):
Volatility will spike and then reverse. We are not quite there yet but are getting close.
Corporations will begin to buy back stocks in large sizes.
Cash gets put to work by institutions when valuations get stretched to the downside. Rest assured, there is plenty of cash on the sidelines.
Short sellers will cover once it is apparent that the downside is converting to an upside bias. They usually come in later in the upturn.
Retail investors, usually the last to come back, will jump back into the market.
Techs Correct but Don’t Forget Dividend Stocks
Large cap stocks, particularly in the technology sector, have felt the brunt of the recent sell-off. You can say that they are in a correction. Corrections are natural, normal and healthy in the financial markets. Embrace them and don’t fear them. A bottom will occur and in the long run you will forget all about the Correction of 2026.
While our Growth Portfolio has retreated a little, our Dividend Portfolio is in the green. In fact, if you had a 50/50 Growth/Dividend Balanced Portfolio, you might be flat to slightly positive. I have hammered this home with my clients and my readers for years.
Richard Siminou is a financial advisor and founder of Siminou Wealth Management, a fee-only investment advisory and financial planning firm based in New York serving clients nationwide.
If you would like to review your current investment portfolio or discuss retirement, college, tax, or other financial planning considerations, you are welcome to contact us or visit https://siminouwm.com/
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This content is for informational purposes only and does not constitute investment advice.
