Once again, we are witnessing another outbreak of some variant from Covid 19. As if the Delta variant didn’t do enough, we now are seeing the possible development of Omnicron. So little is known about this variant, we wait and watch and again witness the experts in the field flub it.
I know I have been very harsh to these experts in the past and obviously, that is more about frustration than anything else but I will continue to call it as I see it. The,”We just don’t know at this point” is becoming old hat and frankly, it’s annoying. The treatment and care and eradication of Covid has been so poorly done that it really is a minor miracle that we haven’t lost more people to this insidious disease. We all know that, so why should we expect anything to change? This virus has done a much better job mutating than we have done fighting it.
You don’t have to be on any side to see that the leadership that has been responsible for dealing with the prevention, care and treatment of this pandemic, have not been working as one. Different state, city, town, school boards, corporations, and individuals have different opinions about how things should handled and lets just say, there is not one clear voice in all the noise. That is the only fact that actually matters. No one is leading. Honestly, I doubt there really is anyone out there that can actually show leadership whilst dealing with dueling philosophies but we can still hope.
The confusion from leadership doesn’t help equity markets much. Knowing what we know and having seen what we have seen in the past, why should we have faith in leadership? Confusion and uncertainty are an anvil around the neck of any bull market and that is exactly what we are seeing, again.
Last Friday’s sell off was a little extreme no doubt but not totally unexpected or unexplained. Thinner volumes, possibly very bad news and a shortened trading day all put fuel on the selloff and there should be no scratching of heads here. Today, we will of course, see a rebound. How strong and how long lasting, that will be the big question and my gut tells me that today will be explained as people bargain hunting because of Fridays sell off. That, to me, is out and out stupid. Not the idea of buying stocks today. The idea that the market is trading at bargain prices. Please gag anyone who says that. Even with the sell off on Friday, stock prices are still very rich. The rout really did not bring many stocks back to a more fundamentally sound pricing. PE multiples are still way above their historical averages and the threats to this run up are still out there.
Take a step back for a second and look at your portfolio. Think about your investment time frame. Think about the next three, six and twelve months and look at what happened on Friday. It really doesn’t change any of your key investment objectives. The picture you are looking at contains a few things that Friday’s action will not change. The Fed will still be raising interest rates in 2022 ( I say the earlier the better). The Fed will be slowing and then halting its bond repurchases. Inflation will slow down for one quarter and one quarter only and then continue to sap consumer buying power. Lastly, When consumer demand slows, the supply chain issues will miraculously disappear.
What Friday’s action will do is create a volatile environment for probably the next two months and that is to be expected. We have the potential of another wave of restrictions and mandates. Most likely, travel restrictions will widen. Most assuredly we will have mass confusion from the ones we need most and we will invariably get disappointed. This wave of concern could have a longer impact on equity markets as people do what people do, they panic, they follow others, they forget the long term horizon for their investments.
My apologies if you feel this is a repeat but sometimes repeating something helps with clarity. The markets are due for a correction. Corrections usually start with a trigger point. The trigger point is usually very apparent in hindsight but rarely is visible at the time. We may be fortunate this time because the latest correction will have a very visible trigger point, the new strain. Will we see the selloff we saw in March of 2020? I doubt it but it is possible since we will be retreating from a higher point so technically it could look very, very ugly. What should an investor do?
As I have stated multiple times, it depends on time horizon. I don’t expect any major shift in market sentiment to last very long. The market structure is such that there are vast pools of cash around the World and with limited options as to where to invest it, equities always come up first or second so there is some backstop level that should prevent total catastrophe. Every selloff in the last five years has reached that inflection point where money flowed back into the market and reversed whatever slide was happening. That will be the case again.
In the meantime, expect higher volatility and the correction I have been calling for. Look at the charts of the S&P and the NASDAQ and see if the selloffs are bigger than the rebounds. Watch the direction of the slope of the decline. If you see lower lows after each selloff, you are in a correction.