Guessing from the feedback I’ve received, we’re in a very enviable position now just sitting in cash. I don’t expect that to change significantly in the near term. Besides, the last thing you really need right now – aside from a bidet and hand sanitizer – is the extra stress of market fluctuations.
Last year we under performed because, if you were looking in the right places, there was an enormous amount of early warning risk being signaled. I spent most of last year writing about the warning the Yield Curve was signaling and how the Cass Freight Index was in recession – in November. The virus is a huge shove to push the economy over the cliff. Things were already weak to being with and now almost all of 2019’s gains have disappeared. The game plan for crashes is as follows.
1. Don’t give up drinking.
2. At some point we’re going to make what could be a crash low in the market.
3. After the crash low we’ll likely see a multi-week rally. This rally is the Fool’s Gold of rallies. This rally will be used by investors, institutions etc. to get out of positions they were caught in during the crash. Hopefully we’ll begin to have some clarity on the spread of the virus too. During this period expect to see stories of companies that blew up like Worldcom, Enron, Madoff. It happens during every bear market. I’m also looking for the Metlife annuity ads with Snoopy trying to lure burned investors with guaranteed 1% returns. That will safely double your money in 72 years.
4. I would expect the stabilization rally to fail and we’ll likely revisit the crash low. While people remember the 2008 low in November, the retest low happened in March 09. I would expect the retest to happen a lot faster than 4 months this time.
During the retest I’ll be able to measure its volatility and intensity and compare it to the initial crash low. If we’re in the process of making a market bottom, the retest of the low will be milder. Instead of 2000 stocks making their lows for the year it could be 700. In other words, fewer stocks participating in the decline. This signals that the virus and recession are already priced into the market. What is not priced in is the economic rebound and that is where the opportunity is.
5. If the retest is successful, that will be the time to put money back to work. If the retest fails and we plunge to new lows, we start over looking for a new crash low and repeat the process.
Over the weekend, we read how the Fed cut rates to zero. When the time comes this move will fuel stocks much higher than where we are today. However, we’re going to need a massive Fiscal package from the government as well.
It’s very likely that we’re in the midst of an enormous opportunity because we’re in cash. Human nature being what it is only sees fear at this moment because so much is unknown. In time we’ll get some clarity and people we’ll be able to see how we’re going to emerge from this crisis. At that point in time investors will begin buying for the economic rebound and thoughts of the recession will fade.
Patience is key. No need to get invested too early.
I strongly suggest to completely tune out and ignore the financial media. Especially anything coming out of the mouth of Larry Kudlow.
During periods of financial stress it’s very common to see articles telling investors they have to now settle for lower returns. This type of “advice” is completely illogical and inaccurate. Bear markets are huge opportunities for investors to make above average returns once the market weakness is over.
Please be safe.