Am I The New Grinch?
Possibly.
Before I start, I am very thankful for so many things so don’t think my grumpiness has anything to do with my personal situation. I think we should all be grateful each day for what we have, I know I am.
Now, getting back to my cause for grumpiness and Grinch-like sentiments. As many who have been involved in the market will tell you, December is generally a pretty good month. Even when things are not going well in the economy, investors seem to have this urge to put money back to work and go into equities with an almost childlike fervor.
I am not one of those people. I like to do my investing based on three things: 1. My belief in the fundamentals of the investment and where they are in their cycle. 2. Looking at technicals and seeing if the price point entry is right. It may seem like timing the market, but it’s not. It’s core research on the stock’s historical trends. 3. My gut feeling as to what the economy and the sector is going to do over my timeframe.
Not a bad strategy but probably won’t be taught in any business schools either. It has worked for me over time and I am all about investment time frame. The hardest thing about my strategy has always been the out. Discipline is important but still, you love a stock and it keeps going up….
Point is, I don’t invest because of some historically dubious idea like a Santa Claus rally. Bah Humbug I say.
Actually, there is a bit of a case for the end of the year rallies that we have seen. It does make sense however if you think about it.
Portfolio managers at pretty much every major investment fund have to succeed at what they are paid to do, they are measured against some index as their benchmark. They beat it, they can put that in their pocket when it come compensation time. They don’t beat it, they try to figure what went wrong, write an extensive note to investors that says basically nothing and then hope they don’t get passed over by some MIT grad who wrote some sophisticated algo that returns something like .015% over it’s benchmark, with no risk. That whole scenario saddens me but thats a story for another day.
To dig into it a bit, if a portfolio manager is up on the year, he will try and protect his profits by supporting the smaller cap investments (it takes a lot less capital to keep a small cap stock up at the end of the year) and leaving his other winners alone. If that PM is under his benchmark, he may have a tendency to add to his winners and maintain a smaller position in his losers. This strategy works well when the overall market is up. That is part of the underpinnings of the Santa Claus rally.
When the markets are down, thats where it get’s very tricky. A good portfolio manager will have a higher cash to stock ratio than he is supposed to have (He sold stocks during the year and did not reinvest the funds). He might be set for that Santa Claus rally because he has cash to buy stocks at a lower level and create the demand side for the rally. Problem is, markets do not go down and stay down because there are strong economic signals. They go down because investors are looking out six to nine months and don’t like what they see. That is why markets typically sell off into bear market territory. With that in mind a PM that has a lot of cash might be buying something that he may think is cheap but the market is telling him/her that it is cheap for a reason. Knowing that, most portfolio managers will tend to suck it up. Remain with more cash than they would like. Ready to reinvest in the new year.
That’s what I think we will see this year. The big money players might put some cash to work in selected sectors or stocks but it will not be enough to dig us out of the whole we are in at this point.
While I am digging around on this, let me put an end to the theory that individual investors have much more influence than they used to. Oh right, the Reddit warriors took control of the market and bashed the big boys. Right. OK. Let’s be realistic. The meme stocks were put into play by some pretty observant nerds who saw the short positions in some truly crappy stocks. Get it out there that we could mess with “The Big Boys” and make some serious money. They did until they didn’t and I am pretty sure more people got hurt during these run ups than made money. Look at two very important facts that were completely lost. The GME short was a good one. The company is losing money, has horrible management and is 2 years behind the shifts in the market place. It was ripe for selling off. Did these Reddit gunslingers actually believe that GME was going to turn around the next day and become this retail, online megastore? Absolutely not. They didn’t invest with idea that they believed in the company. They invested with the idea that they were going to mess with someone(s) who did the research and knew that Gamestop was a piece of crap company with lousy management. Ok, all is fair in love and war right and someone found an entry point that would work as a short term investment. Happens all the time and I am not against day trading based on some research and timing. Not my thing but it is legit. However, don’t try and tell me this group of miscreants will push the market higher. The second important thing and what I am totally against is the fact that Robinhood allowed people with zero experience in investing access to it’s systems for little more than a credit card number and some bogus, poorly written explanation of the risks. Not sure why they weren’t fined and basically shut down for this but they have upgraded their oversight and compliance so that’s something.
Another point about the individual investor is that even if they come back into the market hoping for this Santa Claus rally, they really do not have the financial muscle to have a full scale rally. Savings over the last 12 months have been shrinking. Debt levels are going up. Inflation, while it is cooling, has shrunk the disposable dollar somewhat. So where is this cash that is going to flood the market? Let me see, My choices are; Buy food and gas for my car, buy Christmas presents for my family or…buy 100 shares of Apple? Where do you think people’s cash will be going this year?
Sure we will have these mini rallies but for the next 14 or 15 trading days don’t expect anything but a cold draft to come down your chimney.