This update will be directed at your mind which no doubt has a lot of little voices stirring around. Find yourself in the paragraphs below.
Entering the Best 6 Months For Stocks
Yes, the “Sell in May and Walk Away” thing seems to have worked again. Actually, the mantra should be, “Sell in April and Buy in early October” but Wall Street might be challenged to produce a catchy rhyme with that one right?
If we were to break the year into two time zones (May-Oct) and (November – April), you can see some pretty notable differences in sector performance. Data since 1984 to present.
Today we are facing a broad stock market that is oversold on an intermediate term basis. That means valuations have come down significantly and there are now deals for investors willing to take them. At the sector and country level, I see some very oversold, near extreme, discounts in stocks and indices but they are found in not so obvious places, certainly not in the brands you know and love like Amazon, Apple, Google, FB and Netflix (the Fab Five). Here is a message for all investors of all ages. The worst part of the year is now behind us from a historical average perspective. That does not guarantee a happy 6 months ahead but the probabilities are now in our favor.
Behavioral Economics – Part 1000
We see plenty of evidence from a sentiment perspective that we are somewhere between 12 and 14 on the chart below. Negativity and bearishness are at historic highs. As contrarians, we get excited about that. In fact, if the markets plow through the lows of August 24th for just a quick and savage hit followed by some very robust buying, I’ll say, we’re at that magical #14 “I told you so” spot.
Now, as I mentioned above, “the market” may be following this behavioral script as described but “the market” is just a basket of stocks right? There are sectors and stocks out there that on the other end of the spectrum. The Fab Five could even be in zone 5 or 6. In fact, I heard some talking head yesterday say these words, “Facebook at this price is a gift, I would double down” See #6 above. We have owned Facebook for several years in our New Power strategy (traded not held) with our first purchases made around the $24 level. It hit a high of $98 in June. While we aren’t quite ready to sell yet, we’re certainly not looking to double down. Crazy. Same for the others in the Fab Five. The message to all investors of all ages is this; be emotionally prepared for some upside surprises. Not all things will respond the same however. Panic selling on August 24th set the stage for a meaningful bottom. Now we are seeing a more constructive and complex price structure around those same lows. This is a near perfect set up for a very robust 4th quarter rally. This feels, smells and tastes a lot like 1998 for those who had money on the table then. In that year, the markets bottomed on October 8th and ran higher – much, much higher in a near lockout rally. This is not a prediction, just an observation.
Investors With Current Income
You should be adding cash to your investment accounts now. This will be the last time I say this. Yes, you must throw good hard earned cash, sitting in great gobs in a bank earning zero into the stock market. You should do this in the next 5 business days. It is too early to buy aggressively yet but we’re getting very close and your money must be in place in take advantage of those buys if and when they happen. If this is not a meaningful low in the markets and the beginning of something more sinister, then your cash infusion, will simply sit in cash in your investment account with us rather than the bank. You’ll earn nothing either way but you will remain in a position to take investment opportunities as they come. Eventually stocks will bottom and the chase for returns will emerge. Remember, there is no opportunity for returns in a bank.
Investors Without Current Income
The same goes for you if you have accumulated sideline cash. In most cases, those without current income are often living off of their investment accounts, social security or other pension income and don’t have much sideline cash. You don’t have much to do here accept grind through this emotional moment. Knowing that you rely on your investments and periodically watching them decline in value is part of the package. If you are having trouble with this, there are several things you can do.
First, you can buy yourself a little peace of mind by sitting on 6-12 months worth of living expenses. We do this for all our clients with systematic monthly withdrawals in place. We hold 6 months worth of those living expenses in a sideline cash account and replenish that account once it is depleted, again every six months. In doing so, you emotionally separate your living expenses from your investment balance. The idea is to give your investments a longer time horizon to tolerate some market volatility without feeling like your going to eating cat food next month.
Another thing you can do is constantly work to cut your monthly living expenses. I hate to say this publicly but I continue to see way too many retirees (or those with current income) subsidizing the living expenses of grown children. With job openings at an all time high, there are many employment opportunities out there for able-bodied adult children. Use this market decline and your anxiety as an excuse to have that overdue conversation with your children.
That’s all the advice and enlightenment I can muster for a Friday. The market recovered from an AM bloodbath and is now positive. Hmmmmm
Have a great weekend
Sam Jones
