Blurbs Themes

The market is a feckless child and school is out

I’m introducing the short blurb with this blog post.

Many people are under the impression that the rapid recovery in the market is an indication that things are fine and will be fine, and they missed an opportunity to buy a dip. Here’s a sample of someone presenting that view.

I’d disagree with this for three main reasons:

(1) Anyone looking to the market for confirmation is doing it backwards. In my early days as an investor, I thought the market was the ultimate barometer of truth and viewed it as “right” no matter what; I thought that if one were on the wrong side of a stock (or market broadly), one needs to take a lesson from the market and understand where they are wrong. Experience has taught me this is just dead wrong. The market (and stocks) are prone to tantrums and irrational thought. Be a parent, have some conviction that you know what is right and don’t take your lessons from a child.

(2) We have seen an unprecedented recovery in the financial markets in the past three weeks, far faster than normal. For reference, it took 231 trading days for the market to recover 25% off the trough levels in the 2008-2009 crisis. In 2020, it’s taken 23 days. It took 327 days to recover 50% in 2008-2009. In 2020, it’s taken 38 days. That’s just very fast, arguably too soon, with an economy that is set to see a 40% decline in GDP. Just look around you – everything is shuttered, and as I noted in my post, “Why I dumped all my holdings…”, the consumer is 70% of the economy and most of its growth; that engine is clearly in full fail mode, it is not going to turn around anytime soon (regardless of a turn in the second derivative of Covid-19 death rates), and all datapoints from here on out may deteriorate (or show transitory improvement then deteriorate) (just look at today’s retail sales, industrial production, etc.).

(3) The massive recovery in a short window, when we may not have even seen the true trough, reminds me of a feckless child erroneously applying faulty logic, often from prior examples. But the present situation is not similar to the past; it is its own animal. If you’re taking your cue from the market that the economy will just turn back on immediately, first note that the VIX (volatility index) is at 40%; we’re bound to see wild (silly) swings in the market. Second and most importantly, look at school closings as a barometer. The vast majority will not open until September. Think about how much revolves around that. I don’t believe you see the switches turn back on until school is open.

S&P 500. Underlying data from Bloomberg.
VIX index is above Financial Crisis levels; you should see moody swings.