I am writing from my home library since I’m no longer working in my office in downtown Myrtle Beach.
I’ve always resisted working from home because I don’t want to stress out in my own house. But it hasn’t been bad. I have a hot tub, a pool, cigars, and the cats.
Things are much worse for most other people. The virus and the protective measures have done untold economic damage. Some people are openly talking of a depression.
Already, this is one of the worst bear markets in stocks we have ever had—and it’s only been a little over a month. There was a lot of leverage in the system, and price-insensitive buying, like with stock buybacks, indexing, and short volatility trades.
Now, all that leverage is being unwound. The first 30%-plus drop was a result of that. Whether there’s any more downside is probably a question of economics.
I can tell you that, as someone who watches sentiment, this is perhaps one of the most difficult markets to trade in I’ve ever seen. For the past few weeks, sentiment has been max bearish, the CBOE Volatility Index (VIX) at record levels, and every sentiment indicator or oscillator pegged at zero.
Yet, the market has continued lower. Mean reversion simply has not worked.
Some people are comparing this to the crash of 1929, and the subsequent bear market that took stocks down 89%. They speak with certainty.
I don’t have that level of certainty, and I don’t see how anyone can.
The problem here is not economic. The problem is cultural: Americans are not well-equipped to deal with a crisis like this.
Culture of Disobedience
Americans disobey. They don’t follow rules. They don’t follow guidance. I had to pick up some medicine at the vet’s office for one of my cats the other day, and there were hundreds of cars on the road—just like any other day.
Where I live, in South Carolina, very few people are taking this seriously. People are individuals, and they follow their own judgment. There are few indications this will change, outside of tanks rolling down residential streets.
Because of our culture of disobedience, it’s very unlikely we will contain the spread of the virus. Some people will observe shelter-in-place orders, and others won’t. We’ll “flatten the curve” a little, but we’ll also lengthen the duration of the crisis, without clear resolution, which is actually the worst possible scenario.
Maybe some folks could also stand to do some social distancing from their portfolio. There could be more downside in stocks. Many people went into this with a large allocation to equities. If the market gives you a chance to rejigger your asset allocation, you should probably take it.
Things Were Risky All Along
I’ve been thinking a lot about safety.
Nobody cared about safety going into this. No one. I was reading articles about people investing their emergency funds in growth stocks. That kind of stuff.
For years, I was preaching safety. Bonds and cash. Gold. Huge allocations to this stuff. And there were millions of Baby Boomers who had giant allocations to stocks. Now they are selling—at a loss. It’s amazing.
And because markets are markets, when it’s time for people to take on risk again, nobody will want to. They’ll be interested in safe havens like bonds and cash and gold… at precisely the right moment to go into risk-on mode instead. But that is many years away.
With stocks down a little over 30% from their peak, even with the recent bear-market rally, this is already one of the worst bears of all time. And it happened in a blink.
For years, people have been focused on returns to the exclusion of all else—and not risk. Suddenly, the world seems like a much riskier place than it did a month ago.
Nothing has changed but the perception—it was risky all along.
The stock market is not, and never was, a magic money machine. The stock market has levels of volatility that make it unsuitable for many investors. No one should depend on the stock market for their retirement. It is unpredictable and capricious. And the vast majority of people are psychologically unequipped to handle it.
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Jared Dillian writes The 10th Man, a free weekly newsletter for contrarian investors. Every Thursday, he delivers a torpedo of incisive commentary that crushes consensus thinking and exposes the true workings of “Mr. Market.” Subscribe now!