A reader asked about my Monday comment on a possible “double bottom” in the US stock market. I thought I’d elaborate.
What often seems to happen at market lows in the US is that stocks plummet sharply in a frightening way and then for no apparent reason other than that panic selling stops reverse course almost as sharply.
Many times the selling stops at, or maybe slightly below a point where stocks bottomed before or where they have meandered around without much net movement for a considerable period of time. For us, the two possible stopping points seem to be the point where stocks reversed themselves in December 2019 (just below 2400) and the period in 2015-16 when the S&P meandered around 2100.
Typically, the initial rebound lasts for about six weeks. The market then returns to–or somewhat below–the past lows before starting back up for good.
My observation Monday was that I’ve heard so many commentators predicting that we’re in a double bottom situation now that it may have become the consensus view. That itself is a worry. In my experience, the consensus view rarely comes to pass. Sometimes everybody is wrong; more often by the time the news has passed down to TV talking heads, it has already been fully factored into stock prices and stocks will be influenced by something else. I have no idea what the something else might be.
This shouldn’t be our most important concern as investors.
what we should be looking at/for, in my opinion anyway
The reality is that predicting the ups and downs of the US stock market accurately is very hard to do. In 28 years as a professional investor, I never met anyone who could do it consistently–and plenty of people who lost their shirts–and their clients money–trying.
Market timing is riskier that it might seem, as well. If I remember the number correctly, 40% of the gains in a market cycle come in 10% of the days–the lion’s share of that in the early stages of a bull market (which is just when the conventional wisdom is most bearish).
At a scary time like this, we all are getting a check on our risk tolerances. If you can’t get to sleep at night, you now know you’ve taken on too much risk. Not necessarily all at once, but over time you should readjust your holdings.
Everybody has stocks that blow up on them. This is a good time to analyze clunkers you may have among your holdings, look for patterns in your decision-making that caused them and make changes. This is harder to do than it sounds. But it’s crucial.
If you own non-index funds, look at how well they’ve done versus the market. Don’t just look at the past six months, look back at the fund record for as long as it has been around. Be careful, though, to make sure that the long-term record isn’t just from a big bet that paid off a decade ago.
When I was training new analysts, I’d ask–“Suppose you bought a stock at $50 that you thought could go to $65 and it has fallen to $40 instead. You’ve just found another stock with the same risk profile that you have the same level of conviction in. It’s selling for $50 and you think it could go to $100. But you have no extra money. What do you do?” Invariably the answer would be–“I’ll wait for the first stock to go back to $50. Then I’ll sell it and buy the second one.”
That’s crazy. Stock A can go up 60% and Stock B can double. Why wouldn’t you sell some or all of A now to buy B? The reason is that newbies don’t want to take a loss. Their ego gets in the way of making money. If your portfolio needs to be reshaped, in my experience the sooner you start the better off you will be. Another reality is that the best professionals aspire to be right 60% of the time …and they spend a lot of time trying to minimize the damage from the inevitable land mines.
the stock market now
The only thing I can see to hang my hat on is time. I have no idea about the level at which stocks stabilize. I think it’s reasonable to figure that the worst of the pandemic will be at least in sight by the end of June, particularly as China seems to be going back to work now. Presumably the oil price war will still be on, which is bad for oil companies of all kinds, though particularly so for frackers, but probably a net plus for everyone else.
Three key questions: will tech firms continue to lead the market during any recovery? how will consumer behavior change in response to the fact of quarantine? what struggling companies will be unable to survive a several-month shutdown?