Be Ready For The Rally To Falter
The S&P 500 has enjoyed a swift rally over that last three weeks, 24% since March 23. Based on previous market events, this is not an indication of a healthy market. The implication is that this is a bear market rally and then when everyone is feeling good (has a new bull market started?) about stocks it will whoosh down and scare the hell out of everyone all over again. It happened during the tech wreck and the financial crisis. Bear market rallies are normal and so are to be expected. Up days of 3, 4, 5% are emotionally driven. Heightened emotion is more logically associated with bear markets. Look down any list of individual stocks today and you'll see a bunch up 4, 5, 6 even more percent. The next day the market goes down a lot you'll see individual stocks with declines that large. It belies emotion.
That's not a prediction, that is a recap of normal market behavior. For all anyone knows, the bear market is over, this is not a bear market rally and we're off to the races. That's not a prediction either. I have no idea what will happen, no one does which is why my investment approach is not predicated on trying to guess what will happen but on a process that I am able to stick to no matter what happens.
Up days of 3, 4, 5% are emotionally driven (repeated for emphasis). Against this backdrop, if nothing else it makes sense to be emotionally ready for another sickening swoon. Again, not a prediction but an outcome well within the realm of how similar events have played out before. There's no downside to being ready for more declines, especially if your strategy is to hold on no matter what.
This moment of having no idea what will happen is why I don't believe in selling everything out when it looks like the market should go down. Equities have a long history of going up when they shouldn't. Earnings look like they could implode, GDP could contract by 20-30% on an annualized for the quarter, we already know the jobs situation is dreadful and people are dying from a virus we don't fully understand yet, so why the hell would equities go up? No reason, they could just go up. Still not a prediction. I mentioned the other day that with the heightened volatility of this event I was the portfolio to be less volatile than the index. Through all of this I only sold one equity that was a satellite type of holding that not every client owned. The way I've reduced volatility was by adding funds that tend to go up when the market does down. If the S&P 500 has started a non-stop ride to 4000 I would expect to lag that move not miss it.
The idea of stocks going up when they shouldn't is how the rally that started on March 9, 2009. Right then and there, there was no reason for stocks to go up but they did. I have no reasonable expectation that I could predict with any sort of reliability when absolute bottoms happen so my strategy does not hinge on being able to do that. My preference to be less volatile in hopes of avoiding the full brunt of large declines risks being too defensive depending on how it plays out or not defensive enough. Those consequences are far less than going to 100% cash after a large decline and watching the market recover from sidelines without you.
There are countless valid strategies. The one I use is what makes the most sense for me based on what I think I know about markets and their behavior as well as my limits and my behavior. Your strategy should be suitable to your limits and behaviors. What is not valid is having no plan, selling in a panic and then getting left behind. It happens to people in every event and will happen in this one too. Don't let that happen to you.