Yesterday morning, I met with an institutional prospect who went to cash at Dow 8200. Yesterday afternoon, I spoke with a $5 million individual prospect who has been in cash for over 6 months. Both were scared, proud of their cash, and firmly rooted to the sidelines. At a certain point, the sidelines don’t make sense.
As you know, we began calling for a consumer-led contraction since early 2007 (in print MarketWatch March 2007). We continue to exercise great caution, but market risk is profoundly lower than at any point over the last several years. The Dow Jones Industrial Average is over 6,500 points lower than it was in November 2007. Is there still downside risk? Yes. We don’t know if this is the bottom. It feels awful. Remember, we made three seperate lows in 2002 -2003. The final low was made days before troops went into IRAQ. The market was around 7,700 and rallied over the next 4 years to 14,200. It felt like repeated gut punches at each ‘02-03 low. Today feels like another shot to the gut.
One of my longest-standing investment rules is “If it feels bad, do it!” Selling feels awful at market tops and buying feels bad at market bottoms. Buying feels awful right now, but we are doing some buying. I’m not suggesting going hog-wild. I think that this journey through the dark valley’s depths will likely take longer than most expect. But what feels good is caution. What feels smart right now is pessimism. As markets like this turn positive, there are always groups of bearish investors, anchored to the sidelines busily patting themselves on the back. They continue to pat as the market moves higher away from them.
Today’s market has fallen below 7600. It feels awful. My message is “It’s too late to panic.” The government has created tremendous liquidity in responding to this financial crisis. Money supply is exceptionally high and there is a lot of cash on the sidelines. While I believe it will be a year or more away, I think the risk of inflation as a consequence of so much liquidity is inevitable. Significant inflation means that cash will be devalued. Accounts holding cash will see that cash lose purchasing power. Stocks offer some protection against the inevitability of future inflation. In addition, liquidity accounts are best invested in short term bonds with maturities under 5 years. Staying short in duration will help minimize the effects of inflation when it comes.
In sum, play defense, but PLAY! Investors need to be involved in this market. Valuations at current levels offer a very compelling entry point for long-term investors. There is no need to panic, but there is a huge opportunity to research and invest in exceptional companies that are well-managed and still making money.
Hang in there!
Keep the faith!