“The average man doesn’t wish to be told that it is a bull or a bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn’t even wish to have to think.”
Regardless of how many times we discuss these issues, quote successful investors, or warn of the dangers – the response from both individuals and investment professionals is always the same... “I am a long term, fundamental value, investor. So these rules don’t really apply to me.” No, you’re not. Yes, they do.Individuals are long term investors only as long as the markets are rising.
When it’s clear the game has become rigged, it’s easier and less risky to stop playing that game, and go play a different game somewhere else... There is a huge disincentive to step boldly in the direction of sanity... which serves as a dangerous feedback loop to reinforce a false narrative that everything is awesome and under control.
Should you “sell in May and go away?” That decision is entirely up to you. There is never certainty in the market, but the deck this summer seems much more stacked than usual against investors who are taking on excessive equity based risk - throw into the mix ongoing high-valuations, uncertainty about what actions the Federal Reserve may take, ongoing geopolitical risks, concerns over China, potential for a stronger dollar or further weakness in oil – well, you get the idea. The question you really need to answer is whether the “reward” is really worth the “risk?”
The problem with forward earnings estimates is that they consistently overestimate reality by roughly 33% historically. The illusion of“permanent liquidity,” and the belief of sustained economic growth, despite slowing in China, Japan, and the Eurozone, has emboldened analysts to continue push estimates of corporate profit growth higher. Even now, as the earnings recession deepens, hopes of a sharp rebound in profitability remains ebullient despite the lack of any signs of economic re-acceleration.
This past week has seen a continuation of market volatility unlike anything witnessed over the last several years. Of course, this volatility all coincides at a time where market participants are struggling with a global economic slowdown, pressures from China, collapsing oil prices, a lack of liquidity from the Federal Reserve and the threat of rising interest rates. It is a brew of ingredients that would have already likely toppled previous bull markets, and it is only by a hairsbreadth the current one continues to breathe.