Stanley Druckenmiller's appearance on CNBC this morning got a lot of attention for his mea culpa of apparently missing the bounce off the March low. Todd Harrison quoted him as saying “I was up 2% the day of the bottom, and I’ve made all of 3% in the 40% rally.” He also admitted "I've been far too cautious." You probably also know about Warren Buffett selling out his airline stocks pretty close to the low.
So what is going on here? I don't know and chances are you don't either. There are theories about the Fed's role in pumping up asset prices, one webinar I listened to said the Fed's new mandate to protect asset prices, a lot of stimulus checks appear to have gone into Robin Hood accounts, one Tweet I saw posited that when sports come back, that there will be so much on all day every day that people will be distracted from markets which will cause a swoon and there are no doubt other thoughts.
We know that unemployment is sky high with theories abounding about why and how long it will take to get back to "normal." Productivity, GDP, PMI, statistic after statistic look dreadful. Earnings and revenues are imploding for many industries yet market keeps going up. There is a clear and obvious disconnect between what's happening on the ground versus what is happening in markets. Maybe the market is discounting an epic recovery. Does that make any sense to you? It makes no sense to me but that doesn't matter, it could happen even if it seems unlikely.
At the March low and while it was all unraveling, maybe it did seem different. I tried to convey that it wasn't but without attempting to guess what markets would do. At some point, the decline was going to stop and then the market would go back up and it will eventually make a new high. Long time readers will recognize that I've written a variation on that previous sentence in what might literally be 1000 blog posts over the last 15 years. Looking a little beneath the surface are the mental challenges caused by the lack of a retest, that the snap back has been just as record-breaking in its speed as was the decline.
If you're paying attention closely to the news you are seeing that Covid-19 cases are spiking in a lot of US states. Regardless of whether you think the current spike is a second wave, the numbers of cases and fatalities are alarmingly high and the consequences are dreadful and still the market goes up. I've seen more than a few people opine that the country can't tolerate another shutdown. I think the shutdown helped but whatever, the idea that the uproar from trying to do it again would be insurmountable regardless of whether its effectiveness rings true to anyone.
I detailed the defensive action I took early on with the caveat that on the way down it wouldn't feel like enough and on the way up it would be too much and I think that's pretty much been the case. That sentiment is an output beyond our control. What is in our control is the ability to stick to whatever strategy you chose for yourself as being the best for your goals, time horizon and temperament. For me, that means being less volatile than the market which has been the case on most days.
Druckenmiller implied that he's missed the entire bounce back. Not exactly the case with Buffett, using Berkshire Hathaway (BRKB) as an obvious proxy. From March 23, Yahoo Finance has BRKB up 24% versus up 42% for the S&P 500. I blog all the time about how important it is to never sell out completely because you never know how quickly or when a snapback will happen. Where are you in relation to your highwater mark from February? Are you above it, 10% below, 20% below, 40% below? Whatever that number, if you feel anguish over that number then you were or still are too defensive which will be a lesson for future events.
Looking forward, it makes no sense that there won't be a retest of the low or another scare-the-hell-out-of-them decline as fundamentals start to sync with markets. So many things are so much worse that there is no rational way current levels can be sustainable. But here's the thing, markets don't have to be rational. Someone said to me they don't trust markets right now, but the markets don't need our trust. We have no idea what will happen so it is important to avoid committing to what markets should do such that you get stuck with an outcome you can't tolerate.