I know it seems like the S&P 500 is down a long way, and it is tempting to try to catch the falling knife, but I urge you to step back and have a look at the big picture. Since the bottom in March of 2009, the S&P 500 has rallied more than 200%.
In terms of percentage appreciation, this move is the 4th largest S&P 500 rally in history:
And in terms of the length of time, this bull move is now the 3rd longest rally ever.
This bull market has gone a long, long way, and lasted even longer.
With the recent rout, in the coming days, there will be all sorts of analysis about how this market is cheap. However most of that analysis will be based on relative valuations versus the recent past.
The key will be remembering the recent past was an aberration. It was a QE induced drunken orgy that somehow convinced smart investors that financial assets could be magically levitated with Central Bank balance sheet expansion. There was never any justifiable economic reason for the magnitude of the monster rise in risk assets.
The level at which fundamental “real” investors return to the market to buy stocks is lower. A lot lower. Central Banks have pushed up risk assets to prices where it only makes sense to sell to the next greater fool.
GMO, my favourite value shop, publishes their 7 year forecast every quarter. In all my years watching this report, I cannot ever recall such uniformity of expected future returns.
Usually there are one or two asset classes that are overpriced, but this time there is practically no asset class that is priced to deliver decent future returns. Serious fundamental investors see no real bargains anywhere.
And herein lies my point - don’t assume the recent decline has made the US stock market attractive. It hasn’t. Yes, we will get rallies that energize all the bulls’ spirits. But the rallies will falter.
The only way we get a real rally from these levels is if the Fed returns with more balance sheet expansion. And if that is the case, then there will be much better assets to own than stocks (gold, commodities, all the things investors currently hate.)
Although I think the Fed will eventually ease up on their hawkish rhetoric, this will not be the same as engaging in balance sheet expansion. We are a long ways from QE happening again. If you are bullish, buy Canadian, Australian or European stocks - anything but America. This correction in US stocks is still a long way from being over.
I am taking advantage of the heightened stock market vol to sell some naked calls. I know we will get some rallies. When they come, I want to be selling into them, so I figure being short out of the money calls is a good way to force me to eat my own cooking…
Thanks for reading,