What do you move your money into if stocks are about to drop? Bonds seem like a bad play if we're projecting interest rates to rise at least 2%. RE seems like a bad play if interest rates are going to rise considerably and there is a slow down in the RE market. Going to cash seems like a bad play with inflation running red hot. Gold or commodities maybe? Almost feels like trying to pick the smallest loser.
I don't buy the TINA argument. There are lots of alternatives to going long cash, bonds, or stocks. You can hedge your long stock positions with options. You can buy futures funds. You can go short stocks or bond funds. You can buy or short commodities funds. You can harvest time decay. You can do vertical spreads, butterflies, condors, straddles, strangles, covered calls, calendar spreads, or just buy long calls. You can switch to investments in other countries or currencies. Outside of the financial markets, you can make energy efficiency investments, buy solar panels, buy antiques or art, buy a full health diagnostic panel and interpretive services, buy timberland or oil wells, get an interest-bearing checking or savings account, pay down a mortgage or other debt, engage in private lending or private equity, or literally keep physical cash in a safe.
I'm leaning toward options-hedged stock positions that allow some upside for the next year, but strictly cap the downside. There is a case to be made for a large asseet allocation to cash though. If you really think inflation will be in the 4-7% range for the next couple of years, then you should also believe that investments will lose more value than the cash itself, because investments are prospects to receive cash in the future. The most straightforward example is bonds with yields longer than a year or two, because the discounting math directly reduces their value.
The only way that I see this mattering is if you're planning to FIRE with very little cushion in the next few months.
My timeline is measured in years, and my plan accounts for unexpected expenses, inflation, dips in the market, etc. For me, a market drop just means that stocks are on sale.
I've accumulated most of what I need to retire, so my decisions around the coming market drop will determine whether I actually retire next year, 10 years from now, or somewhere in between. I don't think there has been in modern history a rate hiking series in the 2-3% range within 12 months or so that wasn't eventually accompanied by a severe bear market. I took the image below from
https://www.bloombergquint.com/gadfly/yield-curve-inversion-isn-t-a-foolproof-indicator-of-recession-this-time where a financial journalist is arguing the futures market is wrong and he is right. OK, buddy.
One of the arguments for why rates won't rise this fast is that "something will break" before the series can complete. What exactly does that mean? It means a financial crisis driven by collapsing asset prices and seized bank lending, a bubble popping in the bond, stock, crypto, or real estate markets, a bank blowup or sovereign debt crisis, suddenly rising unemployment, or other outcomes that are unequivocally bad for investments. When I look at the chart, I see the possibility that the speed of rate hikes could outpace the development of the next crisis, which is worse.
The potentially positive paths I can see right now are (a) a new COVID-19 variant emerges and ravages the economy this summer or fall, or (b) inflation rates suddenly decline all on their own due to a withdraw of QE, resolution of commodity supply issues, and resolution of logistical issues leading to a rapid overrun in inventories (
https://fred.stlouisfed.org/series/RETAILIMSA). If either of these happens, assets could retain their currently high values and still-hot earnings and margin growth could propel them higher. This reasoning may justify a hedged stock position for the next year or so.
