Is the Market Rally a Head-Fake? Should I Care?
It’s kinda funny that the S&P 500 made a new high on January 4, and hasn’t made one since. This gives market commentators another useless metric for saying how bad the market is to make it sound worse than it is.
“Worst start to a year since 1939.”
CNN
The S&P 500 is about 14% down from its high, which doesn’t even rank on the list of the worst bear markets in recent history.
The chart above really says a lot. The history of the stock market over the past 70 years is mostly green, with only a few red periods. Down 14% in 5 months can barely even be called a bear market.
Technically speaking, the S&P reached bear market territory (20% down) for a few minutes one day. It never “closed” in a bear market.
There are two ways to look at this chart.
For one, we have a long way to go till the bottom. With 14% down already, maybe we still have 10% to 15% more before the stock market fully corrects. We need a lot of businesses to close, unemployment, and some real cleansing of some of the bad things going on in the financial world.
With the 2008 financial crash, some banks closed (Lehman Brothers) and some bad practices like no-income mortgages ended. New rules for bank behavior were introduced – some of which have been repealed.
The second way to look at that graph is to always be invested. The 100%-500% returns of the green times are more than recovering the -30% losses of the bad times. And if you miss getting into the market, you could miss a lot of the upside.
The graph can in some way be misleading. For instance, a 50% drawdown requires a 100% return on the upside to make up for it. But the graph shows 50% red as being half of the 100% green.
Is The Current Market Rally For Real?
I tend to believe that there is more bad news to come. The war in Ukraine continues, and can still escalate. Shanghai, China still isn’t open for business and retains its zero-COVID policy. This means that it can still close again. The US Fed only begins selling US Treasury bonds (quantitative tightening) today. Interest rates haven’t reached neutral yet and some believe interest rates need to be above neutral to have any inflation-fighting effect.
Europe just announced they are going to stop buying Russian oil. OPEC+ might kick Russia out of the club for now. More major oil deals around the world are being done in currencies other than US Dollars.
The market seems to be expecting a soft landing. The market seems to be expecting that the stock market will continue its normal march upward after this brief period of instability. But it hasn’t priced in ANY of the future bad news.
Personally, I’m not a bear. I’m cautious I guess.
In 3 months, the next rounds of “earnings season” will hit, and who knows which companies will have major stumbles. I almost don’t want to be invested in the stock market during the next earnings season. But that’s also a long ways away.
Should I Be On the Sidelines?
Despite my observation above that future market rallies clearly (always) erase the downturns in the market, I still feel there is more downside to come. This makes me wonder if I should get off the roller coaster ride for now and get back on when things stabilize.
Fear is a powerful emotion.
I’m going to stay invested for now.
I wish there was a safer investment with a decent yield. I’m getting 2.1% at the bank GIC. I wish it were 6% or 8%. There should be a safer way to get that.
