Correction, Or Bear Market?

On February 21st, I was helping an investment advisor I consult with pick stocks for a new client’s portfolio. He lamented that there were not enough stocks at good valuations. This is one of the hardest parts of being an investment advisor: a client expects the advisor to build a portfolio of stocks which should do well, but sometimes, especially in late-stage bull markets, most stocks are overvalued. I reminded him, “The Constitution does not guarantee anyone the right to good stock picks.” He agreed, but he still had to tell his client that the client would be better off mostly in cash, waiting for better values to appear. I did not envy him the task. When the client thinks your job is to pick stocks, it’s hard to convey the message that the best course is not to pick anything at all.

After a week of covid-19 fueled stock market panic, I expect he’s having a much easier time persuading his client to wait. Now the question becomes “How much longer should we wait?”

Calling market bottoms is nearly as difficult as not buying at market peaks. Right now, the stock market has been falling because investors understand that the covid-19 pandemic is damaging the economy and company profits. The extent of that damage remains to be seen, but the consensus seems to be that covid-19 will lead to no economic growth or even a slight decline in the world economy in 2020. Given that stock prices are highly sensitive to current and future growth prospects, my guesstimate is that the pandemic alone could justify a 10 percent to 20 percent decline in the stock market.

The S&P 500 has already fallen 12 percent. If my 10% to 20% guesstimate is right, we could have already seen “enough” decline to account for the likely economic damage of the covid-19 pandemic. Is it time to buy the dip?

I believe it is always wise to hedge one’s bets, and so I have begun to buy a few of the stocks I believe have become better values in the last week (GPPCIGSCHNMIXT). Despite these small buys, my overall stance remains cautious.

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Disclosure: Long PEGI, CVA, GPP. VLEEF, NFYEF, RAMPF, MIXT, CIG, RDEIY, VEOEF, SCHN, Puts on XOP.

Disclaimer: Past performance is not a guarantee or a reliable indicator ...

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