Part of being an investment professional is being a voracious reader. I read so much from so many different sources, it is difficult to remember which paper or website I may be citing. Not being able to remember specific articles after a few days or hours, I mostly say, “I read recently that…” Today’s headlines were like a lot I’ve been reading lately, and they were not uplifting.
The three signals investors should get ‘cautious’ on the market
Classic theory predicts a big rally and then a huge drop for the S&P 500, according to technician
Wells Fargo sees trouble for stocks – brace for a 4% to 8% slide before year’s end
A stock market crash is coming, here’s what could trigger it, warns Marc ‘Dr. Doom’ Faber
I anxiously changed to my stock-quote screens and found stocks in positive territory across the board: Dow, S&P and NASDAQ. So why all the negativity?
Long-time readers of my Market Commentaries may be chuckling and saying, “Look who’s asking!” I get it. I’m always worried, and I’m always cautious. But my comfort in perpetual caution comes from a history of surviving disasters. I feel less comfortable when the rest of the world seems to be agreeing with me. On the other hand, in recent weeks I have felt somewhat encouraged about what the current negative warnings may mean for the near-term future for stocks: because it probably means they’re going higher.
Clients, strangers at the supermarket, people at cocktail parties, and friends from the gym have all been asking the same question: “Michael, when will stocks go down?” “This has got to end.” “There has to be a pullback.” Though I entirely agree, I wonder if the pullback isn’t quite at hand because so many folks are expecting it.
Markets correct and rally unexpectedly. In March, 2009, when the averages were making new lows, everyone was certain that they would continue to fall. I did an interview on Wall $treet Week where I suggested that valuations now seemed quite attractive, and the other talking head on the show with me opined that I was stupid and that the DOW was headed straight to 5,000. That was a moment of relief for me. I was apart from the crowd. I was apart from the stampede that was so self-congratulatory. Folks would wail that the market would go lower, and it would go lower, and they’d say, “See? I told you so!” And they’d say it again, and they felt smart. The short-term results distracted them from the strong underlying fundamentals.
During the dotcom boom, the crowd argued that prices would only go higher. “It’s a new paradigm,” they said. The metrics have changed: it’s all about eyeballs and clicks. Poor old Warren Buffet (he was 69) just didn’t get the new technology and internet gizmos.
See? When the crowing crowd is pointing higher, watch out below. When they are looking for a correction, it’s probably not at hand. But this doesn’t mean it’s time to waive the “all-clear” signal. There is legitimate cause for concern in that stocks have not suffered a correction since early 2016 and valuations are historically high. That so many folks are looking for a correction, though, tells me that my concerns may intensify before we get the correction so many are forecasting.
Yes, over the past 30 years I’ve been in this position before. Anxiety is a familiar traveling companion that sharpens my focus. Our investment discipline guards against emotion and reacts constantly. Our research team monitors all of our investments on an ongoing basis. As prices and various metrics violate thresholds, we sell some or all of those expensive positions. As we redeploy those proceeds, we adhere to our dogged research discipline, which is grounded in fundamentals and emphasizes fortress balance sheets, sound business models, earnings growth, strong cash flow, and limited leverage.
The negative, nattering naysayers abound and will be right someday. History and experience suggest that it won’t be tomorrow. Timing notwithstanding, we continue to invest defensively so that our clients will have a nearby seat when the music stops.