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“You know, Hobbes, some days even my lucky rocket ship underpants don't help.” Calvin & Hobbes

As we said goodbye to 2018, we were lambasted by commentators telling us that the world was ending…once again.

The list of the "terribles" responsible was long and somewhat less than distinguished (or even original):

  • Rates were going to kill us, and
  • The Fed was out of control (and the Fed Chair was out of his mind), and
  • Crude oil was too cheap again, and
  • The consumer was tapping out, because
  • Robots were going to take us over, and
  • Tech was dead, and that meant
  • The bear market was on (in a big way), and lest we forget
  • Trump was an idiot, and
  • Border control was a lie, so now
  • China was going to destroy us, and
  • The Russia probe still had 6 years left, meanwhile
  • Europe was falling into an abyss, weakened by
  • Trade wars consuming us all, and did I mention
  • Trump was an idiot..?

But that Was not nearly enough. By virtue of some perversion of economic thought it was somehow a bad thing to have a record number of people working...and a record number of jobs open to be filled.

Of note: For those whose grasp of reality begins and ends with political affiliations, I was in no way intending the reference to Trump to be leveraged into some message about Republican or Democratic party alignment.

In fact, I’m chuckling as I write this.

As we “fell” into Christmas Eve morning, the bearish culprits were made real by media-driven sentiment and were set to join us for perhaps even longer than some unwelcome relatives over the holiday break.

Well, that’s what the experts said away…even Santa was skittish about being mistaken for a drone.

The pull of emotions is strong. Very strong. I confess to having consumed exponentially more fruit-flavoured TUMS pre- and post-Crimbo than any Xmas stocking could reasonably expect to hold.

"Get Me Out Now...For Good"

The investor footprints in that snow-filled period told the story.

Hundreds of billions of dollars in ETF's and Funds were shoved off the cliff and into the "get me out of this fu$$ing market right now...Mr./Mrs. Advisor" channel, piling deeper into the chute as the days of Q4 2018 wore on.

And the rip cords of parachutes darkening the sky were being pulled by one thing: Choice.

The choice to listen to the crap instead of the good, to live in the storms instead of out there on the horizon, and recognize during that cold, dark and very common (yet uncomfortable) reality that there is no way out of these windows of temporary garbage and price insanity.

You simply have to stay the course towards your financial goals.

There will always be some set of stocks in the portfolios that are "not working" and eliciting that assured emotional response that "these things suck."

The Tragic Cost of Fear...

The phrase “Market Volatility” grabs most folks by the throat.

But those big words as steeped in misunderstanding.

Movement is normal in markets. 

And fast movement is not driven by the market. It is driven by people invested in the market making what often prove to be unwise decisions. 

Consider that we are now about seven weeks into the new year and what feels like decades away from the end of Q4. 

Yet we’ve already seen many investors do what has always been done in these aftermaths - experience the tragic cost of market volatility.

According to Lipper data noted here in the early weeks of 2019, investors liquidated a truly staggering sum of investment holdings.  The tally is well above $190 billion out of Funds - and ETF's too this time.  

They flooded into money market funds (read: cash) and bonds, as Q4 2018 bled itself out.

The last time investors leapt out of risk assets in such large numbers was during the 2008 global financial crisis.  I won't even begin to tell you how much that cost.

Sadly - and with the benefit of hindsight, one can see that the decision to "go to cash in Q4 2018" came at a steep - what I call 'sad and tragic' - cost.

Since Christmas Eve, when the S&P 500 touched bear market territory with a ~20% decline from September highs, the market has rallied strongly.

January 2019 delivered the best rally to start a new year in over 30 years according to the historical number-crunchers.

But for investors who went to cash in Q4, one wonders how many of them sold when the market was at or near the bottom.  The data shows that a ton of them did.

The direst of all the consequences is that the inflow of data shows a massive share of investors who sold, remain on the "sidelines" sitting in cash or bonds...for the sake of safety.

And if I were to venture a guess as to when "the future will be clearer" for these folks I’d say about that would be at about Dow Jones 39,000 to 48,000, give or take one or two panics.

And Now?

Under the “dirty little secrets” category on Wall Street, Mrs. Market does not give you time to think about all that crap. 

There is no timeout or whistle between quarters.

Instead, history tells us that 95% of the best days in the markets come within 3-5 trade sessions of the worst days in the markets.

And in what could almost be described as a cruel trick, equity markets tend to rebound just as quickly as they decline, often whipsawing investors who try to "time" entry and exit.

I have learned that those who say they can "time" the market are really just hiding from telling you they are scared sh*tless when it is going down in waves of ugly, unrelenting panic.

The bad news is that the steady at the wheel approach means we are required to absorb losses on the downside in short windows while participating in the gains in the long windows.

So far, it always has worked out that way. Here’s the world in blue and orange living colour:

Terribles Chart1

Try Not to Overlook What's Really Happening

The entire world as we know it is rolling through a pace of change that no one has ever lived through before now. And the noise - if you let it – can overwhelm you and push you off your long-term path.

Here’s a snapshot going back to the lows of 2009, when sentiment reached negative extremes.

The emotional levels are colour-coded for you:

Terribles Chart2

Don’t overreact in the short-term.

Stick to your plan.

And accept that the market moves in cycles and you have to accept the short-term bad to benefit from the long-term good.

Mike_williams
Author
Mike Williams
Founder and Managing Partner of Genesis Asset Management, New York