October 15, 2018
The jolt to markets last week was severe in speed, but not really that bad in percentage terms, but it brings back many bad memories for those who have experienced sharp downturns.
As market prognosticators (like myself) get on the airwaves and debate what the bottom looks like, whether it is safe to buy things again and all the merits of one investment thesis or another, my only advice is to be patient. Finding a bottom is a process.
Of course my core thesis for months now has been that this market represents asset prices which are unsustainable and fail to accommodate the risks facing investors. But of course these risks are rarely immediately obvious to everyone and even if they were, they would be interpreted differently by large swaths of society.
Along those line, I have discussed one of the major risks elsewhere, and that is that the barriers between the four pillars of the US system appear to be breaking down. In the past, citizens could count on the Executive Branch being held accountable by the Judicial Branch, but the rise of Justice Kavanagh within the framework of a Trump presidency suggests that this may not be true any longer. Of course it will take time to understand whether that is the case, but the appearance of the politics, mechanics of the process and ethical grey zones, all apparent during the confirmation process suggest this is a serious risk to the status quo.
Another risk that reared it’s ugly head last week was the debt burden supporting the spending, supporting the earnings of the market. As interest rates spiked upward (again it was the speed, perhaps, and not the level), investors became nervous about how it would impact debtors. It is good to be worried, but how worried won’t be clear for weeks or months.
So buyers seemed to jump back in on Friday and are easing back in today, and that may bring some comfort, but finding a bottom is usually a process, and it could be weeks before we know that the market is willing to stay at this level or go higher with conviction.
With earnings beginning this week, and piling on for the next four weeks, there will be plenty of opportunity to worry, and perhaps to be overjoyed with how well everything is going. Unfortunately, with unemployment in the low single digits, tax cuts in the rear view mirror, and deficits climbing rapidly, all while governments build trade barriers through tariffs, breakups and perhaps other misdeeds, it is hard to imagine things getting better.
So it is worth considering that prices may take a while to find a bottom; perhaps asset prices are too high to expect much improvement and that a safer option might be to be patient, and possibly even scale out of positions and just wait for a better time to invest.
Of course that doesn’t answer the question, what do I do with the cash, but I will leave that for another day.