Down 8 or 9% in two days is absolutely a panic. It might be justified or not, I don't know and I'm not trying to predict anything but this is a panicked reaction. If you want to call it a crash, go ahead although I don't know if that is the best word. My comment about panic is more about observing behavior that has repeated in cycle after cycle, it doesn't matter to me in real time whether the word is crash, correction or something else.
The selling today is far more of a washing out than yesterday. There were quite a few things on my screen that were up yesterday and that is not the case today.
That doesn't mean it is over but the washout nature of today is better than if the market panicked higher at the open and then failed. A unambiguously down day coming after another unambiguously down day is a form of capitulation. Well known investor Mohamed El-Erian used the term "necessary and sufficient" on Bloomberg TV this morning. The signs of capitulation are necessary but what we've seen so far, may not be sufficient in terms of having any idea when this event will end. But it will end.
Wading through this sort of thing stinks but the observations in this writeup are based on how previous scary events have played out before. The details are always different. In 2008 people thought the global financial system was going to end. In 2020, people thought the world was going to end. The current event is so illogical that it might not make sense to try to articulate it yet.
Even though the details are different, the market manifestations are always the same. The market goes down a lot, scaring the hell out of people, then it stops going down maybe for no reason at all and then it starts to work its way back up, eventually making a new high. The only variable is how long that all takes.
The worst thing to do in a panic is to go along with that panic. We do not know the duration of this event but we do know the outcome. I've been writing pretty much this same email in event after event for 20 years and it always plays out the same way. It ends and then markets go back up. And I promise you that when this one ends, at some point later there will be another market event with different details but the same manifestations.
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2 comments:
well said! What I would like to know is where prudent risk management and money management ends, and panic begins.
One remembers that fabulous movie about the GFC, "Margin Call", where the baddie at one point says, "you're not panicking if you're the first out the door".
That door is very much closed, but it still might be the second inning. One never sells in the 8th or 9th inning of a bear market, that's for sure, but every bear market save 1987 and 2020 had plenty of dead-cat bounces that were pretty good selling opportunities.
Interesting question. I sold a floating rate fund for clients yest that was down very low single digits YTD out of concern that the current event could have hurt credit a little further down the line.
So it was sold before anything bad happened. Only the few clients that read the blog and if they see this comment will know the logic. If you own anything that hasn't been hit but could be in for some pain later, I don't think that would be panic.
For the equity sleeve, if I was going to sell anything from here, it would actually be to BUY more of one of the reliably negatively correlated tools I use or maybe add a different one. Same effect on the portfolio of reducing net long exposure with less consequence of being wrong if Friday was the bottom.
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