Things have settled down a bit in the stock market. Since that nasty crash in March, stocks have mostly been on an upward trend. So, has the stock market already bottomed out? Or would there be another leg down from here? I can’t say. I admit it would be a useful thing to know but I don’t know if such things can be predicted with any confidence. I know I can’t.
Some investors may find it puzzling that the stocks have recovered so much off their March lows. Even though the economy is still largely shutdown and no COVID-19 therapies or vaccines are in sight. But here we must keep in mind that the market is always forward looking. It’s looking ahead to how the economy might begin to re-open in the next few months. Ken Fisher recently posted a short clip on his Facebook page explaining this forward-looking behavior. Among other things he said this:
Always and everywhere, stocks move before reality does. Stocks are pre-pricers of the future—sometimes between 3 and 30 months into the future.
The entire two-minute long clip is worth watching, if you have time.
Stocks have been in this recovery mode because I think the market anticipates the economy to gradually open up in a few months. And some effective therapies and vaccines are to be developed in a year or two. But it’s also conceivable that there will be setbacks in its path—a second wave of infections, failure of a promising therapy, and so on. So instead of a V-shaped fast recovery, we could see stocks do a W or a U. Or as Jon Gray (COO of Blackstone) said in a recent CNBC interview, stocks could even do a Nike swoosh i.e. quick drop followed by a gradual recovery. Who knows? The future is unknowable, after all.
This leads me to my second point: We will never know when the market has reached a bottom. It’s something we could only find out with the hindsight. And that’s obviously not much help to investors who look for signs of recovery before investing in a down market. This investor inaction can lead to missed opportunities, as we’ve seen so far in this market decline. Those investors who’d wanted to avoid catching falling knives may have already missed the market bottom. As Warren Buffett wrote in October 2008 when we were in the middle of the last bear market: “If you wait for the robins, spring will be over.”
Last week, I listened to another excellent podcast where Michael Hanson of the Fisher Investments was interviewed. The topic was the state of the markets today and COVID-19 impact. In the podcast, Hanson covered this forward-looking nature of the stock market in depth. Here’s a quote from that discussion:
This is hallmark to all investing … There will be no all-clear sign. There will not be a signal of any kind that tells you it’s time for the market to go up. In fact, quite the opposite. The market moves ahead of things.
On April 6th, Howard Marks wrote a memo titled Calibrating. He talked about his views on market tops and bottoms:
To insist on buying only at bottoms and selling only at tops would be paralyzing. So it’s my view that waiting for the bottom is folly. What, then, should be the investor’s criteria? The answer’s simple: if something’s cheap – based on the relationship between price and intrinsic value – you should buy, and if it cheapens further, you should buy more.
It’s not easy to buy when the news is terrible, prices are collapsing and it’s impossible to have an idea where the bottom lies. But doing so should be the investor’s greatest aspiration.
This is indeed what I aspire to do in my portfolio too. Most of my stock purchases this year were made in March when share prices were collapsing and there were many eager sellers in the market. Since that March buying spree, I haven’t bought any more stocks. The market didn’t touch its low point of March 23rd again, and so my dry powder (or what’s left of it) stays on the sidelines.
Earnings season is about to begin in earnest. I am eager to hear from CEOs of my portfolio companies. Their views on this prior quarter and what lies ahead are invaluable to me. It helps me keep track of what’s going on in their respective industries—besides how each individual business is doing. I also get a window into the overall state of the economy. I own a pretty broad-based portfolio of companies. They operate in diverse industries, often led by long-tenured industry veterans. Many of them have great insights. I pay attention to their quarter-end commentaries and earnings conference calls. In fact, I get more out of CEO commentaries than I could from watching the endless CNBC parade of experts and economists.
Let’s see what our CEOs have to say about this past quarter and what may lie ahead. It’s an interesting time to be an investor.