Stock market operators are a superstitious lot. Trained to calculate probable, future outcomes and eager to recognise patterns in random market gyrations they are regularly wacked by happenstance. Seasoned traders therefore fancy shamanistic rituals, hoping to force a more fortunate outcome, like gamblers do, or early agricultural societies threatened by weather’s vagueness. Developing their own 100-year calendar, they state that we must sell in May and leave it at that until summer’s end. As with all perceived wisdom there’s perhaps a kernel of truth in it.
During holiday season, markets become less liquid, with many stock market participants taking to sailing, fishing, or golfing instead of non-stop observing the hectic needle of the ticker. In thin markets even trivial events can trigger exorbitant price movements. It makes sense to better stay away and wait until the dust has settled. Often markets move sideways in summer, making one’s absence painless.
What does this mean in practice? Can we possibly sell our investments, all of them, and wait until the stock market frenzy has played out? I have done so once, against the other, more broadly accepted wisdom that one can never time an exit without suffering a bad, much too late entry when the tide would come in with force and we will have missed out on the disproportionate gains of an early bull market.
When at the beginning of the new millennium the dotcom bubble had reached its climax and investors started to wonder if all those trailblazing internet companies should perhaps show some rudimentary capabilities to earn money instead of burning it through with abandon, markets started to tremble. From a stock market peak in August 2000 shares started to retreat. In June 2001, after a fall of 20 per cent, I saw the bright future looking distinctively less bright as not only had those hyped start-ups begun to lose worth, but bricks and mortar companies too.
I sold all my investments lock, stock and barrel. By September 2001, when the S&P stock market index had fallen further to 1,546.88, I reinvested in the same companies again, feeling very smug when the index reached 1,720 in December. I had saved myself a loss of 15 per cent and looked like a well-timed genius. Until 2002 that is, when all my gains were wiped out with the index reaching 1,192 in September that year. Only then did my fortunes turn, to 1,866 in November 2007. This was the apex before the Great Financial Crisis, as I would soon learn, which ruined my shares, like everybody else’s, when it indexed 917.39 in February 2009.
The likelihood of sizable, future, share price gains is diminishing, while the chances for disappointment are growing
Watching my portfolio emerging from the flash crash in March last year seems to prove that staying invested is a safe bet for ill-informed outsiders. My eternal laggards –’under-valued’ oil companies, miners or banks – have recovered almost to their erstwhile glory. Fertiliser companies, materials and consumer stocks all bask in the limelight of unprecedented economic growth. Even money-destroying oil services companies and shipping are doing much better. I look at a set of investments which all have done much better than anyone would have thought possible.
Can the party last? Alerters are raising their voice. Company valuations in relation to their actual earning-prospects have reached the heights of the dotcom party before its end. It is often argued that abysmal bond yields, which are the mathematical basis for discounting future earnings and hence justify exorbitant present values, make shares still look cheap. As long as earnings and dividends can beat bond market returns there should be no reason to worry. I myself have jumped on this calculus.
Yet aren’t we kidding ourselves? Low bond yields are only here to stay as long as the economy is not picking up to its full potential. We cannot have a roaring economy without investors moving out of bonds, credit becoming more expensive, and even our eternally bounteous central banks considering a cautious retreat from largess. We make stocks so expensive today because we expect the economy to boom. We cannot at the same time expect credit to be priced for weakness forever.
Old hands like former treasury secretary Larry Summers and investment legend Warren Buffett warn about imminent, once-in-lifetime inflationary risks. It is difficult to scrutinise available data, which are distorted by preceding inflationary weakness.
We still suffer from COVID-induced supply bottlenecks, underinvestment and impediments to trade. We still see high unemployment, which may not recover as quickly as hoped for. But we see pent-up consumer demand, and thanks to fiscal largess, unprecedented, potential, spending power. How much consumers will splash out their lockdown-induced, unusually high savings is anyone’s guess. The new-found pricing power of US corporations meeting no resistance when passing on increased cost of energy, raw materials and components, is certainly ominous.
Inflation becoming manifest and entrenched will dissuade bond investors to stay invested. Central banks, short of permanent, inflation-feeding direct government financing, will be powerless to fend off rising interest rates and to hold up asset prices. This may trigger a bear market which will take long to discern inflation winners.
As we can witness now, a bull market is lifting all boats. It is not difficult to invest successfully in exuberant times. Even the most ossified companies can come alive and start kicking. Bear markets have the opposite effect. Some companies, like the dotcoms from yesteryear, may suffer more, but in the end, all will suffer to varying degrees. The argument to better stay invested, no matter how true, is therefore illogical.
If stocks can be overvalued or underappreciated as they can and therefore be worth buying or selling, then the same must hold true for the stock market in its entirety. Note that I have great talent to misjudge value. Over the last year I have refused to buy Tesla, sold Mercedes and invested against all advice in Nikola.
This leaves us retail investors with the counter-logical, yet dire experience that we will always struggle with our timing. Neither could I have predicted how far the dotcom bubble would deflate, nor how fast the rebound of 2020 would approach.
Not having panicked during the March crash last year has certainly helped me to see my investments grow impressively. Yet like the sell-in-May adage, we can cautiously assume that from now on, and in the best of all cases, stocks will move sideways.
If valuations are already based on astronomical future growth and unprecedented earning power, where can we go from here? The likelihood of sizable, future, share price gains is diminishing, while the chances for disappointment are growing. The least we can do when outright selling is fraught with peril is to act with restraint.
The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice, or advice on the buying and selling of financial products.
andreas.weitzer@timesofmalta.com
Andreas Weitzer, independent journalist based in Malta