News Cycles

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Markets are down a huge amount in the past two weeks (about 20% for US Equities) - So what are we to do?
S&P 500 recent price performance

Lets look a bit at what drives short term movements in the markets and then we can figure out what to do.

First of all: Fear and Greed drive market movements. When we are fearful of the future, prices go down and when we are greedy (or confident) they go up. Unfortunately following the herd is almost always the worst thing you can do. If you want to be successful you must lead the herd. 

Secondly: As much as they want you to believe the opposite, the news does not drive the market. The news reports what happened in the market. If markets are down, they do not focus on what went well that day, they focus on what might have caused the downturn. The opposite is true when markets go up.  The news causes up and down cycles to go farther than they otherwise would.

Thirdly: When you are looking for returns in investing you are looking to get compensated for taking on risk. When prices are high the return per unit of risk is low, when prices are low the return per unit of risk is high. We are looking for high returns per unit of risk taken.

Therefore: You are better off buying things at lower prices, period. But when are they low? You need your own compass that is separate from the herd. Two weeks ago was the worst time to buy equities because they hit new all-time highs and yet many did so with no worries. Today would be better (but I am not recommending it, yet). My research says there are likely better deals coming.

I believe we have entered into a negative news cycle and these typically last a year or more. However, the speed of the decline may indicate that this one will be shorter. The bad news has spread beyond virus. It also now includes energy, the election and I believe you will soon start hearing about markets most never think of like the high yield bond market and the repo-market. Both are showing signs of serious stress. Energy has been an issue the past couple of years and elections happen like clockwork, everyone knows it is coming. What is different is that things are down and so now the news is focusing on fearful topics rather than hopeful topics.

So, I recommend to let the news cycle play out.  Follow my blog recommendations. We will begin buying back into equity markets soon (it will be through High Yield debt first). About the time you want to throw in the towel and never invest again, that is the time when we want to be fully invested back into equity. That is when equity has the least risk and will give you the most reward. 

Markets are exciting again, risk is becoming more valuable. These are the times when fortunes are made....and lost.   

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