It Took Ya Long Enough
In my last blog post I addressed the concept of "complacency" and how accommodative monetary policy has provided the support needed for the market to be "stubborn" even in the face of the manifestation of real exogenous threats. This time I would like to address the flip side of that dynamic, which is when the market finally does react.
No doubt the last few trading sessions have been cause for concern for many investors, especially those approaching retirement. As of right now, we are between a "correction" and a true "bear market". From the record close on 2/19/2020 through 2/28/2020, the SPY has returned -12.70%.
If you've been following the coronavirus, then this violent market reaction should not come as a surprise. Rather, it is the timing of this correction that is most upsetting. The information necessary to predict that the coronavirus is a real and meaningful threat to the global economy has been available since late January. At that time there was a small risk-off movement, but after that the market shrugged it off. You can see this in the chart immediately below:
In such instances, the market's delirium provides opportunity for substantial gains. However, it has been said that the market can remain irrational longer than one can remain liquid. When one endeavors to engage in opportunistic investing, one should be prepared to fail, learn, and try again. Most importantly, one must not presume that one can generate repeated success as an "opportunist" without substantial effort. There are a great number of intelligent persons and powerful machines crunching these numbers all day and night all around the world.
If, however, one does not have the time and energy that is required to be a successful opportunist, what can be done to mitigate the damages of inevitable contractions? The answer is simple: seek out uncorrelated and inversely correlated assets that one can buy and hold patiently without suffering the deterioration of time value. Consider gold and bonds. Over the same period of time previously discussed (from 2/19/2020 through 2/28/2020), the GLD ETF returned -2.25%. The BLV ETF, representing USA long bonds, returned 3.19%.
Warren Buffett observed that a rising tide lifts all ships. When the tide goes out, however, some will find themselves cast upon the rocks. Here then we can see the enduring value of multi-asset allocation, especially late in the business cycle.