Don't Just Do Something
From its low on March 9 to its high this week, the S&P 500 has had a 50 percent move. Thanks to the law of large numbers that doesn't come close to retracing what the market lost in the crash. Still, 50-point moves don't come along very often -- not in five-month spurts, anyway -- and they're the sort of thing that trigger the voice in your head that insists you have to do something, and soon. Bad idea.
One of the problems is that whenever you get the urge to "just do something" you can always find perfectly plausible, well reasoned arguments to do just about anything.
For example, you could, like Jim Paulsen, market strategist at Wells Capital, focus on the trillions that investors have languishing in cash at 1.5 percent or less. That's a lot of money yearning to earn higher returns. Paulsen points out that the ratio of cash holdings to stock market capitalization is 95 percent. When adjusted for the interest-rate and inflation environment, that's the highest the ratio been since 1991. The implication: Despite the market's move so far, there's a whole lot of fuel left to power stocks higher.
Source: Wells Capital Management
On the other hand, you could focus on the hurdles yet ahead in the economy, which would suggest that you want to get the heck out of the market. Yes, GDP is shrinking at a slower rate, but consumers aren't spending yet (except to dump their clunkers with Uncle Sam's help), and the recovery that appears on the horizon is likely to be anemic at best and unsustainable at worst. That's what economist Nouriel Roubini, Dr. Doom, said in Australia earlier this week. Other sober market thinkers, like Mesirow Financial economist Diane Swonk, reach roughly the same conclusion from the economic data: Stocks have gotten ahead of the fundamentals and are headed for a bruising.
You could also fret about China, which instead of pulling the world out of recession, could drag it back down with a financial crisis of its own, scarily envisioned by former Morgan Stanley analyst Andy Xie in this post China Has Become a Giant Ponzi Scheme at the blog The Big Picture. (Or in my own more sedately titled post last week.) If you buy that scenario, you'd take what profits you've made in this rally and head for the hills -- or at least wait for a pullback to get back in.
The moral: there are always two sides to any trade. It's never clear who was right except in retrospect.
The better plan, I believe, is to duck the question of the market's direction altogether. Have the intelligence (and modesty) to know that you'll probably only hurt yourself by trying to pick among the likes of Paulsen, Roubini, Swonk or Xie. Focus instead on your own long-range asset-allocation plan and let that be your guide. It's not glamorous and it's not easy, either, because it means ignoring the your instincts and the buzz of expert opinion. But you can find plenty of support for that approach on this site from Jill Schlesinger, Allan Roth, Charlie Farrell, Nathan Hale and Larry Swedroe. I'd recommend that you listen to them, and not that voice in your head.
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