I Rarely Do This... But a Serious Market Shock Is Now in Play

This week’s update at a glance

• The macro environment has deteriorated quickly. The speed of the moves in bond yields, currencies and global money flows matters more than any single number, particularly in a highly leveraged financial system.
• This is a warning, not a crash forecast. A serious market shock is now a credible risk, but several vital confirmations are still missing. Credit spreads remain relatively calm, volatility is subdued and US equities are still near their highs.
• Bonds are at the centre of the risk. The US 10-year yield has pushed towards 5%, while changing relationships between US and Japanese yields could alter global capital flows in ways that are difficult to predict.
• Preparation matters more than prediction. The objective is not to conduct a fire sale. It is to know what you want to hold, what you would be willing to reduce and whether having some extra cash would give you greater flexibility if volatility accelerates.

What you’ll learn

• Why the speed of change in bond yields can be more dangerous than the absolute level of yields.
• Which market signals would provide confirmation that the risk is becoming more serious.
• Why selling strong long-term investments and simply buying them back cheaper is far harder in practice than it sounds.
• How cash, predetermined decisions and portfolio clarity can provide both protection and future attack capital.

The thinking shift

You do not need to predict a crisis to prepare for one. There is an important difference between recognising that the probability of a damaging outcome has increased and betting that the outcome will occur. My normal approach is to observe and respond after the market provides confirmation. This is one of the rare occasions where I believe the speed and unpredictability of the macro changes justify thinking about risk slightly earlier.

That does not mean abandoning quality assets. It means being clear in advance about what you are prepared to hold through volatility, what you are less committed to, and how much cash would leave you psychologically and financially comfortable if markets move quickly.

What history shows

The idea of selling before a correction and simply buying back at lower prices sounds appealing. The difficulty is execution. Google provides a useful example from 2022. The share price fell by roughly 44% over 13 months, but the journey included repeated apparent breakouts, reversals and whipsaws that made re-entry progressively more difficult.

That does not mean investors should never reduce risk. It means there is a cost to trying to sidestep every decline. If the long-term investment case remains intact, reducing weaker or lower-conviction exposure while retaining the assets you are prepared to own through volatility can be a more practical solution.

Where I’m focused now

• Bond markets: Not simply whether the US 10-year reaches a particular number, but how quickly yields continue to move and how global bond markets respond.
• Confirmation: Credit spreads, equity-market weakness, volatility and the reaction of long-duration assets will tell us whether the current macro risk is actually starting to transmit into markets.
• US equities: Major indices remain close to record highs and semiconductors are holding relatively well. For now, equities are not confirming the more bearish macro case.
• Gold & silver: The longer-term backdrop remains compelling, but a genuine market dislocation can initially force investors to sell liquid assets, including precious metals. Volatility should be expected.
• Portfolio preparation: Know what you want to own through a difficult period, remove what you are not prepared to hold and preserve enough flexibility to take advantage if better opportunities emerge.

Important information

_{Any advice in this video is general advice only. Neither your personal objectives, financial situation or needs have been taken into consideration. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs, before acting on the advice. Garry Davis (AR No:317590) is an authorised representative of Primary Securities Ltd (AFSL No. 224107).}

_{Note to traders* The publishers of this article/information/promotion wish to disclose that they may hold stocks mentioned in their portfolios and that any decision to purchase those stocks should be made only after the purchaser has made their own enquiries as to the validity of any information in this article/information/promotion.}

_{Past performance should not be taken as an indicator of future returns. Trading and investing in financial markets involves risk of losing money.}

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