Stock Market Clichés as Indicators for Today’s Investment Environment

Here is a list of some of our favorite stock market sayings and how they could be interpreted today.

1. Don’t fight the Fed.  In many instances, it has been very bullish when the Federal Reserve is focused on providing stability and credit for financial institutions.  If the Fed is determined to contain volatility and provide liquidity it is usually a good time to own stocks.  Right now, the Fed is “all in” and doing even more than they did in 2008, which is a bullish indicator.

2. Stocks climb a wall of worry.  There is plenty out there to worry about, so we will call this a bullish indicator as well.

3. Get greedy when others are fearful and fearful when others are greedy.  There was a lot of fear at the end of March, but with a sharp rebound, investors seem to be less fearful than they were just a few short weeks ago.  We also call this the “Go to Cash” indicator.  When clients call and want to go to cash that is generally a bullish indicator.  More people have called lately to invest in rather than to get out of the market, so this is a split indicator, balanced between bullish and bearish. 

4. You find out who has been swimming naked when the tide goes out.  Beyond the visual, bull markets cover up a lot of investor mistakes, which become quite glaring during a bear market.  We do our best job to review and vet all our investments, but with each large market downturn we have always had one or two investments that did not perform as we had hoped.  We have learned over the years to sell and move on, rather than hope for a rebound.  Doubling down in Vegas rarely works and, in many cases, when an investment is not performing in line with expectations, we treat it like plutonium.  This is neither a bearish nor bullish indicator.

5. Buy low sell high.  You would think this is a no-brainer, but it’s not.  As of today, the S&P 500 is still down about 20% from its high in February.  So, stocks must be cheap?  But corporate earnings will be down a lot this year, so stocks are expensive.  However, interest rates on bonds of all types are at all-time lows, so stocks are cheap relative to bonds.  Inflation will likely remain in check for some time and usually stocks do well during periods of modest inflation.  But they do not do particularly well in a deflationary environment.  Good luck trying to predict the rate of inflation over the next few years.  According to Gina Adams, Chief Equity Strategist for Bloomberg Intelligence, compared to bonds, stocks are cheaper now than they were at the bottom of the Great Recession.  According to Jeremy Grantham of GMO LLC, his projected annualized real return for domestic large cap stocks is -1.5% over the next 7 years due mainly to high valuations.  So, are stocks cheap or expensive?  Only time will tell, but current stock market valuations have both bearish and bullish attributes and we will call this a tie as well.

While the market is still trying to sort out the fallout from the Coronavirus, we continue to believe there are pockets of opportunity in the stock market.  Hopefully, the above examples will give you some clarity around why our goal is to always stay balanced and diversified, because at the end of the day no one knows the direction of the markets over the short-term.

Stay well and take care,

The Bond&Devick Team