Why Is Everyone Bearish, Especially When They Can Remain Rational?
2022.05.21 11:56
This week, I was speaking at the Italian Stock Exchange’s TOLEXPO event; a very important event in Milan that gave me the opportunity to speak and engage with several investors.
The feelings I heard expressed ranged from fear to anxiety to uncertainty. In general, there was a good deal of pessimism. A few investors were also inclined to invest because when the markets go down you buy better, but again that was a small minority.
Yet, once again, we must put the situation in context…
The stock market, if we look at the S&P 500 index, has lost 18.16% since the beginning of the year. We also note that the drawdown (calculated from Wednesday’s close) since the beginning of the year is the second-worst in history.
Source: CharlieBilello
Here we can look at the glass as half empty or half full. We can focus on how negative this period is, or we can focus on the opportunities it offers.
I personally focus on the latter, but I do so for a specific reason: I am an investor, and my strategy is built for its first major milestone in 2030. This volatile period will be just one of many that I will probably have to face.
Also, as I always remind readers now that everyone is talking about recession, the average drawdown in recessionary periods is -24% (see below). When I say prudently let’s keep the possibility of a -25%/-30% market in mind, this is also inclusive of similar reasoning. Of course there have also been worse drawdowns, but we have to look at probability and statistical frequency.
Source: Goldman Sachs
Recently, Morgan Stanley released a report regarding the possible levels of the S&P 500 between now and next year, in 3 scenarios (basic, pessimistic, optimistic) and ranging from a 17% drop from the current level to an 11% rebound, as per the image below.
Once again, however, I feel that predictions of this kind are of almost no value, if not purely for barroom style conversation, as one cannot predict the future.
Better as I always say to focus on strategy, and how to behave should certain scenarios actually occur. I find that much more practical.
Source: Morgan Stanley
Finally, once again we note that despite a -18% drop in the market, prudent investors’ cash levels have surpassed not only the COVID period, but even the subprime crisis.
Source: BoFA
This is yet another demonstration that going with the flow and getting slammed left and right by the markets is common practice. These cash positions are probably a result of selling (at a loss) positions that were evidently mismanaged before.
Once again, I always have to laugh: people do the opposite of what they should do when buying in a store, i.e. purchasing products at the normal rate instead of waiting for discounted prices.
This is a contradiction that has no parallel in human behaviour, and should make us reflect on how very often disappointing results come not from the market, but from oneself.
Until next time!
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Disclaimer
This article is written for informational purposes only; it does not constitute a solicitation, offer, advice or recommendation to invest as such and is in no way intended to encourage the purchase of assets. I would like to remind you that any type of asset, is valued from multiple points of view and is highly risky and therefore, any investment decision and the associated risk remains with you.
