Posted by: Steven Tresnan
Since Memorial Day weekend marked the unofficial start of summer, many of us in the Northeast find ourselves scrambling each weekend to get away from the office, making a mad dash for the shore town that has become our special home away from home. This phenomenon may be much more widespread along the east and even west coasts of the U.S., but, in my experience from living around Philadelphia and New York City over the last 10 years, the “Jersey Shore” was not just created as a backdrop for the former horribly-genius TV show by the same name; it is a very real and significant part of life here. Fortunately, it’s not all “Sun’s Out, Guns Out” emblazoned tank tops and “Gym, Tan, Laundry” (GTL) routines. Rather, much of the shore scene is very family-oriented, often spanning multiple generations. And unlike the fortunate few that helicopter out to their weekend destinations, we drivers can be reminded on any given weekend of the impressive amount of shore traffic that cannot be escaped on the coastal roadways of New Jersey.
For my newlywed wife and me, that special Jersey Shore town is Cape May – the southernmost tip of New Jersey, or Exit 0 of the Garden State Parkway. We met on a bench outside of the Ugly Mug restaurant during Memorial Day weekend seven years ago, and were recently married the day of our anniversary on the beach in Cape May. The wedding? It was beyond expectations, and absolutely perfect for us. The travel? Not ideal – especially for our friends and family dedicated enough to have made the trek from Pittsburgh, PA.
When setting a GPS to drive from Pittsburgh to Cape May, it will indicate an estimated travel time of just over 6 hours. When our Pittsburgh guests told us this estimate, I had to laugh … and then I tried to adjust their expectations that it was extremely unlikely. When traveling on a Friday during beach season, there will be plenty of traffic to easily extend such a trip to 8+ hours.
While I now have the luxury of commuting via public transportation into New York City, I spent many years of my life in suburban America, driving everywhere, sometimes as much as 35,000 miles per year, basking daily in the joys of “stop-and-go” traffic. I have noticed that drivers tend to speed up as soon as the herd starts moving, closely following the car in front of them, and then slam their brakes when the cars stop again; instead of this tactic, I prefer to go about 15 miles/hr, holding back the cars behind me, with the goal of not having to touch my brakes. My assumption has always been that this should smooth out the traffic for drivers behind me, but only based on intuition. Upon doing some research on this topic, however, there exists not only anecdotal evidence of truth to my traffic strategy, but also a book dedicated to the subject of traffic, including case studies that indicate I may be onto something. Essentially, adding this space between cars provides a sort of “traffic cushion” that quells the waves and actually improves the traffic flow.
After spending years managing investments, it is difficult to look at traffic patterns and not be reminded of financial markets and business cycles. These waves of traffic are very much like market volatility and the oscillation of economic activity. Sometimes financial markets do well (traffic moving), and other times they perform poorly (slow or stopped traffic), and they often follow patterns. The same is true of the economy. Things improve, everyone accelerates, adding to investments, spending money (or credit), until they are moving faster and faster. Then someone receives a tweet (this applies directly to both driving and finance, in today’s world) that causes them to take their eyes off the road and slow down, or to sell some investments out of caution. Other drivers (investors), overreact slightly, pressing the brakes a bit harder, or selling even more investments; this scenario is then repeated and compounded, sometimes resulting in outright panic, with slamming of brakes of selling of all investments (many at deep losses) in favor of cash, eventually bringing everything to a standstill. In the worst cases, an accident occurs, rapidly resulting in the above process, regardless of whether or not there “should have been” traffic. These macro risks, such as political turmoil, financial crises, or wars, can abruptly change the landscape of the investable universe, with little or no warning.
As with the above “smart motorist” strategy, central bankers attempt to cushion wavy economic cycles via monetary policy. To speak in simplified terms, when they see “cars” slowing down, they can lower interest rates and try to encourage borrowing and spending, in an effort to get things moving again. Conversely, when inflation is rising, and the economy is speeding along, increasingly in danger of “overheating,” central bankers can raise interest rates and attempt to tap the brakes of the financial system. This latter scenario is similar to what has been making headlines for months now, as the world is wondering when the unemployment and inflation situation will spur the U.S. Federal Reserve to begin raising interest rates.
As advisors, our goal is to build volatility cushion into portfolios, by developing a clearly defined investment framework. By “setting the GPS” to reach long-term goals, we can look beyond the waves of traffic on the horizon, or even take alternate routes to try and reach clients’ financial destinations more quickly. With a broad perspective, it is easier to remember that we should expect volatility at times; this “congestion” is temporary, though unpleasant, and the cars will eventually start moving again. A slow-and-steady, long-term investment approach should allow investors to eventually catch up to the “speeders,” while minimizing the amount of time spent “sitting in traffic.”