Notwithstanding disappointing jobs numbers and tanking mortgage applications (more on that later), the global economy appears to be picking up a little steam. With that, and with U.S. equities trading at 15 times next year’s earnings (an okay valuation [historically speaking]), there’s reason to be optimistic going forward. After we get over one heck of a hump that is. A hump consisting of Syria, the Federal budget, the debt ceiling, the QE taper, Germany’s election, and any other source of political risk you might think of.
So how is it then, that, with this looming multi-humped hump, the market seems to be poised to test its recent highs? Well, we could say—as I did yesterday—that the humps are all either known-knowns or known-unknowns—in which case (perhaps) anything more than your garden-variety correction isn’t likely in the cards. However, not seeing myself as a great prognosticator (which is good news for our clients), I feel I should always expand my explanations as my thinking expands.
As I continue to ponder this predicament we find ourselves in (a market that won’t contract when logic says it should), another thought occurs to me. I’m thinking that if the general investor/trader sentiment around the recent highs could be characterized as euphoric, or highly optimistic even, we’d very likely be in the throes of a “painful” correction (at a minimum) right about now. That if everybody had been jubilant and, thus, in the market, these known-knowns, etc.—as they approach—would inspire substantially more than the few single-digit pullbacks we’ve seen so far this year. But that (jubilation) hasn’t been the case: I continue to hear the pundits term this the “most hated rally in history”. In fact, for those high-flying hedge fund managers, the 2013 bull market has been an utter disaster. Through July, the average hedge fund was up something like 4% on the year. Why? Because their managers figured the known-knowns would lead to something very different than what’s actually transpired for stock prices. Plus, they say the retail investor (Joe Shmoe)—remaining the victim of post traumatic stress after the 2008 bear market—has, by and large, stayed away as well. So what do we get? Professionals (desperate to keep their jobs) aggressively buying the dips, and/or, sadly, having to cover their shorts, and individual investors—looking at the recent results for the 401(k) options they no longer own—finally succumbing to that affliction so common among individual investors: chasing returns. I.e., they tend to buy the most recent best performing funds (which, of late, would be U.S. stock funds).
So then, with hedge funds and individuals playing catch up, we should expect the coming dips to be bought up just like the last several, right? Wrong! All I’ve offered here is one possible explanation as to why the market hasn’t taken the kinds of hits recent headlines might otherwise inspire. Now, that said, I can predict with 100% confidence that every future dip will indeed be bought, I just can’t tell at what level—some will inspire buyers at 3%, some (fewer I suspect) at 30%.
Now, in case you’re thinking about it, trying to time the dips is the most foolish of games to play:
For example: Let’s say you sell at 3%, expecting 30%, and the market rebounds—you’ve just blown what could turn out to be an unfillable hole in your portfolio.
Or, let’s say you sell at 3%, expecting 30%, and you get 30%, then buy back at 30%, and the market rebounds from there. While you’ll feel like a genius, you’ll be utterly doomed for life. For you’ll believe you got it (that “it” no one I’ve observed in my 29 years as an investment consultant has ever got), and you’ll attempt it again, and again, and again. Blowing hole after hole after hole in your portfolio. So don’t do it…