Q: Was the risk worth the reward? If an investor “rode” the market out from March to today, losing @35% and regaining @50% to break-even, was the risk worth the reward?
In this specific case, because we get the benefit of seeing what has happened, the answer is yes. Yes, because the risk was the market not coming back to a break-even level quickly from its March losses. Now, we know that the market has reached new highs in August. However, the market, in our opinion, is treating COVID-19 as an outside influence and has priced in a perfect economic recovery. For a wild example, let’s say we were to have World War 3, “The War to end all wars,” would the market treat it as an outside influence? No? Then why does a global pandemic get treated as an outside influence with a perfect, turn the spigot on, recovery? We do not think that the perfect economic recovery is likely, and again in our opinion, we believe that economic data is indicating the US economy is far from recovering.
Q: Why does the NASDAQ seem to be acting independently of the economy?
The NASDAQ is up simply because the NASDAQ is up… It is being driven up by short term mathematical mechanics on the Institutional side. In other words, math formulas that measure short-term moves and invests accordingly. This is also known as momentum trading. These types of trades pay no attention to the direction of movement. All it cares about is that there is momentum. Therefore, these same trades can drive a market down as fast as it pushes it up, i.e. March ‘20. A word of warning about the NASDAQ (or any other high-flying stocks), the last time it was a “can’t miss” investment was possibly 2000. The Index peaked in 2000, then lost approximately 80%, taking 14 years to recover.
Q: If you have cash on the side when is a good time to get back in?
First, this depends on your goals for this cash. But if you want to invest this for the long term the current low-interest rate environment is going to produce low returns for investments like savings accounts or CDs. However, the good news is that you have “dry powder.” So, our advice is to make sure you are in the correct risk model for your goals and consider investing in the fixed income side of the portfolio now. As for equities (stocks), we believe there will be a correction. If history continues to be true and we are not at a brand-new point in the market history there will be another leg down in the markets. If you look at P/S ratio, Buffett indicator, CAPE ratio and other indications of value we are in extremely overbought conditions. This means that prices are expensive relative to their historical value. Considering this, we believe that this is not the best time to buy stocks. Therefore, you should be patient.