January 18th, 2019 – 3:30pm –

One of the most important things I have learned, as a parent, is to discuss with my boys the challenges of life outside of the situation that is actually taking place. Of course, this lesson resulted following periods of great frustration during which I tried to question the rationale of a decision in the midst of the chaotic and often difficult event. For example, my oldest son, on a fairly regular basis, tends to misplace items of importance.  While I have no idea where he inherited this trait, (wife rolls eyes and laughs while helping me find my misplaced keys) it does absolutely no good to discuss the importance of responsibility, routine or organization in the midst of a hunt. In fact, it often acts as a wedge in the relationship as well as complicating the task at hand. A better approach is to discuss all of these lessons during a time when nothing is lost or misplaced and the environment is pleasant and safe. It is amazing how his response changes from defensive to receptive, and, I’d like to think, we slowly make progress.

I use this metaphor as an intro to this letter, as we take a moment to discuss the current market environment, when all is perceived to be just fine and we’re back to an upward and onward bull market; or, at least, so it seems.

I am not sure why I remain dumbfounded at just how irrational the behavior of investors can be during times of fear and times of greed. Just a few weeks ago, during the December sell-off, the clouds of wall street were as dark as I can remember in quite some time. Santa Claus was nowhere to be seen, and, on December 21, I wrote the following words:

Barring a complete stock market crash, it is my opinion that these panic sellers seem to be going much too far. You see, when everyone is busy throwing out stocks and worrying about the end days, we’ve begun using some of our preserved cash to venture slowly, and very cautiously, back in. With a levelhead and cool hand we’re slowly looking to pick up some of the bargains being thrown out with the panic. To remain diversified, we’re using ETFs and to keep costs at basement levels using index only exposure.

It was not easy during those dark moments to remain level headed and enter the fray; however, it was our view that the selling had gotten far too intense and a snapback was going to transpire.

Fast forward just a few short weeks, and while I’m not at all surprised with the price action and the rebound we’ve seen in the general market, it is the general mood and character of the bounce that has me the most concerned. In an incredibly short period of time, we have moved from desperation and panic to euphoria and a fear of missing out.

As most of you know, I am inclined to, and will often, change my opinion as the facts warrant. I believe flexibility is one of our firm’s strongest assets.  So, do not misunderstand my intention with this piece. I will be the first to admit that if the underlying fundamentals have, in fact, changed and we’re going to once again see revenue and earnings growth that warrant higher stock prices, we will buy more stocks with confidence. So far, that doesn’t seem to be what is happening.  

The Dow Jones reached a high of 26,951 on October 3 and reached a low of 21,712 on December 26. This 5,000 point drop, over a 3-month time period had very little bounces along the way, and it is one reason so many became so bearish so quickly. When prices fall as they did in such a rapid manner it is easy to believe the world is ending and the market is headed straight to zero. When this happens, the negativity becomes so great that a bounce is often inevitable and is something we’ve seen in every major bear market that I have studied since the 1987 crash.

Now the Dow has moved from 21,712 to 24,700 as I write this, recouping 3,000 of the points it lost during that slide. One would assume that most folks are pleased with recouping more than ½ of their losses and may start to lighten up and be glad to have not sold stocks at the bottom. This unfortunately would be the rationale thought when, in reality, what I am hearing from the general investor community is the idea that they should be invested more, taking greater risk and wanting to recoup all of those losses faster and faster.

This later thought is a dangerous one and often leads to those investors becoming the ones who are forced to sell out during the next round of declines. You see, it takes new sellers to move the market lower, and my fear is that anyone chasing stocks here will be the ones who sell during  the next correction.

While I work diligently to form educated opinions and work within the confines of an educated game plan, I do not have any idea what the future holds. Anyone who tells you they do is someone you want to stay far away from. What I do know is that just a few weeks ago, when everyone was selling, we stepped in and bought. Now that everyone seems to be panic-buying, we’ve been, once again, trimming back positions and raising cash. If the fundamentals change and warrant we buy back in, we will do so.  However, until that happens I will continue to move as I believe is appropriate and not get caught up in the emotion du jour.

Until further notice, I am operating under the premise that we have entered a bear market. During these markets, we will experience incredible and strong bounces that mask themselves as bulls. They work hard to suck us back in, but we must remain disciplined and diligent while we wait patiently for our fundamental clues that the coast is clear.

While I am also pleased to see higher stock prices, I prefer to use this as a time to take more caution rather than throw caution to the wind. It will be interesting to see how it shakes out.

Until next time