Dalton — Last week I was not able to write a Capital Ideas column because I was getting in what will likely be my last bit of work travel for a while. A lot has happened since I’ve been gone from The Edge. For instance, last week was the worst week for the stock market since 2008.
Some years, nothing happens. Some days, years happen. We’ve been experiencing daily moves in the stock market that typically take years to transpire. The average year sees about a 7 percent return for stocks. We’ve been seeing 7 percent swings in a single day. The pace of information has been so accelerated that I’m almost scared to submit this column, because the world might have changed dramatically before it even goes to print. The past can’t be changed so I’ll share what I’ve been doing over the two weeks since I wrote my March 11 column, “Observe and React.”
In “Observe and React,” I said that as recently as the prior day, March 10, I was further reducing equity allocations in favor of buffer funds (which is a tool used to invest in options in order to protect some downside while still allowing for some upside). I referred to that move as the third “phase” in getting conservative in investment portfolios, which had been our strategy since late January. I explained that, “to be safe, we’re positioning for a recession.” Well, now we’re in Phase IV. Phase IV is a full-on recession. I mean, we won’t know if that’s technically true for about a year, after the unofficial official arbiter of recession measurements, the National Bureau of Economic Research, says so (it takes a long time to accurately measure a $20 trillion economy). However, you’re not going to convince me that the U.S. hasn’t entered into a recession. Over the last two weeks, I’ve taken advantage of rallies, however brief they may have been, and sold equity. Over the weekend, we designed new trades for Monday morning (no matter whether the market was rallying or not) to sell even more equity.
I know what you’re thinking: If you didn’t follow my advice over the last two months and gotten more and more conservative, is it too late? I don’t think so. I mean, I could be wrong and today might be the day to broadly buy stocks. But why would you want to take that risk? If today really is the start of a huge bull run, can’t you just get back into the market later when it looks as if the nation has a firmer grasp on how to stop COVID-19 without pushing us into a recession?
As I write this column, the S&P 500 is down about 33 percent. Not that I like to be a slave to the statistics, but historically, once the S&P 500 drops 20 percent or more from its high, the index continued to suffer. The average decline is 39 percent (or about 6 percentage points lower from here).
We should get an incredible relief rally sometime soon, but given that we’re only about a month into a bear market — and the average duration of a bear market is 22 months — whatever rip-your-face-off rally we might get at this time, I fear, won’t be sustainable. Whether we get to enjoy a rally, or even stabilization, the cure to the coronavirus — absent a vaccine — appears to be global governments pushing their respective economies into recession. If it were just a U.S. recession I was worried about, maybe I’d start buying stocks now. If it were a typical recession, maybe I’d start buying stocks now. However, I can’t predict when the growth rate of outbreaks will slow, or when the government will let us get back to work, or even if we will feel comfortable getting back to socializing once they let us. There are too many unknowns and too much volatility in the market. I’m not completely out of equity, but I’m getting close.
I know the popular thing to say is “we’re invested for the long term; volatility is a normal part of being invested in the market.” Horse puckey. There ain’t nothing normal about this. Being out of equity may not allow me to get all of the upside if the market rips higher from here, but I’m perfectly okay leaving some money on the table if it means I’ve increased the odds of protecting my capital.
This article originally appeared in The Berkshire Edge on March 25, 2020.