Kevins Korner

El Nino and the stock market (10/10/2014)

"If the thunder cloud passes rain, so let it rain, rain down on him"-- from MLK by U2

The 2013-2014 rainfall season was the driest on record for the Bay Area (and the records date back to the mid-1800s!).

Now forecasters are talking about this winter being an "El Nino" weather pattern, with the probability of above-average rainfall.

For a little perspective on these extremes, check out the rainfall totals in SF in 2013 compared to the 1997-98 El Nino season:

2013: 6 inches

1997-98: 43 inches

Will this winter bring huge rainfall totals? Is this finally the year when the trend of drought is reversed? Might we be at a turning point right now?

Of course, forecasts are basically educated guesses, and we all know from watching the evening news that weather forecasts are far from 100% accurate.

So how do we use this forecast--what, if anything, should we do? At the extremes, we could either do absolutely nothing or build an ark. But neither seems like a constructive way to react to this El Nino forecast.

Maybe the best thing is to do a check-up and take care of some things that haven't been a problem in the recent dry years but could be if the forecasts are correct. Like fixing the nagging leaks in your windows, and taking the tarp off the shed and actually patching the roof (both personal examples, by the way). You don't need to build an ark, but it's always good to be prepared.

So what does all of this have to do with finance???

Well, much like the weather patterns, we may be at a turning point in the trends in the stock market.

After a few years of almost uninterrupted gains, the market has started to look vulnerable, and volatility has increased. Some forecasters are calling for a 10-15% pullback in stocks. And much like your reaction to the El Nino forecast, there are a lot of ways you can react to these stock market forecasts (which generally are not a heck of a lot more accurate than weather forecasts).

If you're the "build an ark" type, you can move everything to cash (and maybe even store it in the ark :-) ). If you're the "do nothing" type, you can just cruise through it.

But maybe the most constructive action is to do a check-up. Have your stock holdings increased well beyond normal as a result of the market gains over the past five years? Do you still have an adequate cash reserve that can cover unanticipated expenses for the next 12-18 months? Are you comfortable and confident in the investment mix you have today and the level of risk it carries?

Forecasts are just educated guesses: if they were a sure thing I'd be watching my Oakland A's head to the World Series right now. But there are constructive ways to view forecasts, particularly when there is a chance of a long trend reversing itself and catching you off-guard. Don't resign yourself to uncertainty, build confidence and awareness. Don't panic, prepare.

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