Today’s, as I type, 3.4% rally in stocks is precisely what I virtually promised would occur (not the timing of course) in yesterday’s video commentary. Having lived through several bear markets during my career I’m all too familiar with what are termed “bear market rallies.”
Another phenomenon that is all too familiar, relative to early-stage bear markets (if indeed that’s what this turns out to be) is the unusual number of folks currently reaching out to me, offering to bring me new cash to buy with, or inquiring as to whether we should put some of the existing cash in their portfolios to work.
I totally get the sentiment, and, frankly, as Treasury Secretary Mnuchin proclaimed this morning, this very well may be a great buying opportunity, “just like the 1987 crash.”
From my vantage point, however, no — other than perhaps rotating modestly (and incrementally) to infrastructure-esque sectors, which we’re contemplating — I’m not the least bit itching to put available capital to work at this point; while fully expecting to see huge counter-trend rallies as we sit on our hands.
Why? Well, for one, our macro index just gave us the lowest score of its existence (other than back tests), and that’s without much of the coronavirus hit — what’s been and what’s to come — reflecting in the data. For two, if indeed the prevailing bias has turned resoundingly bearish, inevitable huge rallies notwithstanding, history suggests that the market will go ahead and perform the clearing of 11 years of built-up excesses that is in my view necessary — in the face of huge government stimulus efforts — before we can begin talking about sustainably healthy conditions under which we’d be moving back to all-out growthy mode.
Here’s from my email response to a friend’s inquiry yesterday:
“Here’s how 2008 played out. Note all of the efforts amid the 17-month bear market: Bush tax cuts, 75 bp rate cut, all of those housing support programs, TARP, globally coordinated central bank stimulus, zero interest rates, QE… There were numerous counter-trend rallies that these programs spawned, but each failed until most of the excesses were shaken out..”
click to enlarge..
All that said, history never repeats, although it sometimes “rhymes.” And, yes, “those who don’t study history are doomed to repeat it.” Or, let’s say they’re doomed to feel some serious pain when history rhymes.
We can’t know to what extent, if any, the current bear market will rhyme with those past: In terms of present conditions rhyming with the worst ones, we came into this one with excess valuations, a weakening macro setup, and a credit bubble (corporate) for the ages. Ample reasons to remain cautious, in my estimation…
With regard to those inevitable counter-trend rallies I keep referring to, and history sometimes rhyming, here’s from one of history’s greatest traders:
“That is about all I have learned—to study general conditions, to take a position and stick to it. I can wait without a twinge of impatience. I can see a setback without being shaken, knowing that it is only temporary. I have been short one hundred thousand shares and I have seen a big rally coming. I have figured—and figured correctly—that such a rally as I felt was inevitable, and even wholesome, would make a difference of one million dollars in my paper profits. And I nevertheless have stood pat and seen half my paper profit wiped out, without once considering the advisability of covering my shorts to put them out again on the rally. I knew that if I did I might lose my position and with it the certainty of a big killing. It is the big swing that makes the big money for you.”