The market drifted lower, about 5% last week (week of March 30th), as it appeared the virus was getting worse. Over the weekend, we had some good news from Europe and New York City, that it appeared cases were slowing, and our social distancing was “bending the curve”.
We came into the first full week of April and the market went up over 10% for the week as of this writing. This morning, the U.S. weekly jobless claims were a total of 6.6 million. A few minutes after another bad jobs report, the Federal Reserve unveiled more stimulus in the form of a $2.3 trillion in programs to support the economy. As we have said before, the stock market is a discounting mechanism. In the short term, the economy and the stock market are only loosely linked together. The stock market is a leading indicator and recent moves suggest it is starting to look through the current news and trying to find some light at the end of the tunnel. The important thing going forward, is the trajectory of the virus and getting some therapeutics and ultimately a vaccine, so we can start to get our economy going again.
I shared a chart in a previous email showing how good the 1,3, and 5 years returns were from the bottom of a bear market. I subsequently made the case it is impossible to time the bottom of a market correctly and consistently. Ben Carlson, of A Wealth of Common Sense, had this anecdote about how even one of the greatest investors of all time can’t time the market and doesn’t try.
“I’m surprised we haven’t heard of a bazooka purchase from Warren Buffett and Berkshire Hathaway yet. Buffett is known for finding deals at favorable terms during a crisis.
There is no shortage of companies or entire industries that could use Berkshire’s war chest of cash at the moment. This feels like a ‘when?’ not an ‘if?’ situation and I’m sure plenty of investors will be interested in seeing what Buffett and Munger finally do when they make a decision.
Regardless of what the Oracle ends up buying, Buffett can’t time the bottom any better than you or I. He’s made plenty of opportune investments over the years but that doesn’t mean his success hinges on nailing the absolute nadir of the market.
It’s easy to become obsessed with predicting the bottom during a market crash. Positive outcomes during down markets have more to do with your time horizon as an investor than your ability to call the bottom.
When the stock market took a nosedive in the 1960s, one of Buffett’s clients called to warn him that stocks would surely fall further. Buffett responded with two questions:
- If you knew in February that the Dow was going to 865 in May, why didn’t you let me know it then?
- And if you didn’t know what was going to happen during the ensuing three months back in February, how do you know in May?
Markets are driven by trends and psychology in the short-term so it’s possible stocks continue their downward trajectory. But the truth is no one knows how far these things will go or what expectations investors have already baked into current prices.
Markets feel more uncertain today than they have in some time. Just know that no investor has ever had complete clarity about the path markets will take over the short-to-intermediate-term. There are far too many variables at play to know what will happen with anything approaching certainty when it comes to market psychology.”
The stock market is full of regret and second guessing of decisions. If you buy too early, you will feel the losses even more; if you buy too late, you will have the classic fear of missing out. This really only matters in the short term, which right now feels more important than ever. In the long run, these day to day up and down moves won’t matter. What will matter, is having a long-term, well thought out plan. That’s what we have at La Ferla Group and we are working hard to make sure we make the right decisions for our clients for the long-term.
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Regis R. Dillon, CFA, CFP®
Chief Investment Officer