Regardless of the market situation, are you always looking for investing opportunities? As you’ll read further below, you don’t want to be 100% in cash.
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Don’t Let Current Events Scare You From Looking for Investing Opportunities
Inflation and rising interest rates are still dominating the investment landscape. With the Ukraine conflict having no end in sight, sanctions are keeping commodity prices high. COVID is not gone and is still fueling inflationary pressure by disrupting local labor markets in the US and Europe and currently has shut down China.
Short-Term Interest Rates
To control inflation, the Fed has embarked on a path to increase short-term interest rates and reverse the Quantitative Easing that has been the policy since the Great Recession of 2008.
Can the Fed thread the needle to moderate inflation but not throw the economy into recession? This is a genuine concern and is reflected in the interest rate yield curve. Rates have risen on the short-end of the curve faster than rates further out on the curve. This flattening means investors expect that, in the future, a recession could be in the cards.
Bond Values
Bond values have declined. The Vanguard Total Bond ETF (BND) is down about 6% this year. The Vanguard Long-Term Bond Fund ETF (BLV) is down almost 17%. That’s a dramatic decline. It is more than twice the decline in stocks as measured by the S&P500.
Stocks
Stocks have been stuck with the market seemingly having no memory from day to day. One day they are up on some news and down the next on a different piece of news or concern.
Earnings season has just begun. Investors will find out the impact higher input prices will have on company profits. Ironically inflation helps improve nominal revenues. The question is whether this will offset higher costs.
Investors have been steadily selling home builders and home improvement companies like Home Depot. The conventional wisdom is that higher mortgage rates will hurt housing and related businesses.
Negative Market Sentiment
Sentiment is negative across the markets.
The old adage on Wall Street is that stocks will turn up before the actual news flow improves. It’s hard to know when stocks will bottom.
How much do stocks need to fall to discount the impact of inflation, higher rates, and maybe a recession? The market is not monolithic. Some stocks or industry groups will discount the news faster than others.
The next few weeks of corporate profit reports will hold a lot of clues.
Should Investors Be 100% in Cash? No Says Munger.
This week I listened to Charlie Munger speak at the Daily Journal annual meeting. In addition to being the Vice-Chairman of Berkshire Hathaway and Warren Buffett’s right-hand man, Munger is on the Board of The Daily Journal, a newspaper and specialty publisher.
Munger was asked if in uncertain times like these, should investors be 100% in cash. His response was “No”. He said that he prefers a strategy of always looking for opportunities.
Munger is a wise man and while he will admit he is not always correct, any comment from him is worth exploring. I see his point. Investing is not easy.
Investing in Bull vs. Bear Markets
In roaring bull markets, the rising tide lifts all boats.
In bear markets, one has to work harder but the rewards can be substantial. There is an urge to want to be out and wait for the bottom. The problem is that the Market Gods will not send you a telegram to tell you that the bottom has arrived. Even if you were smart or lucky enough to get out near the top, will you be smart or lucky enough to get back in?
Often, the market makes a big move up as it moves off the bottom, a move that is easy to miss. Given that getting in at the precise bottom is near impossible, why do investors talk about waiting for the bottom? One doesn’t need to buy at the exact bottom to do well over time.
>> See Don’t Try to Time the Market; Just Invest
Leon Cooperman on CNBC recently said, and I paraphrase, that winning in a bear market means losing less. So investors should take smaller positions. Take some profits on bear rallies and yes, make sure to keep cash around to buy as opportunities present themselves. It’s about defense and blocking and tackling. It is hard to keep investing during corrections and bear markets.
Investing During Times of Increasing vs. Decreasing Risk
One thought exercise that might help is one that Howard Marks of Oaktree Capital introduced. He proposes that as a company’s stock price rises, its risk increases. It has more room to decline if things go bad.
Conversely, as shares decline in value, risk also declines as it has less room to fall. It’s an interesting way to think of risk. Younger investors should, in a way, look forward to periods when the stock market declines so that they can buy at attractive prices and let their long time horizons give them the runway for gains.
It’s not only younger investors who can benefit from a decline in stock prices. As a stock’s price declines, its dividend yield rises. There is a case for receiving both significant income with growth from stocks.
Thanks for reading. Don’t hesitate to reach out if you would like to further discuss the markets.
>> Download the April 2022 Newsletter <<
Image credit: Cockney Sportsmen Finding a Hare, published November 12, 1800, by James Gillray (English, 1756-1815), published by Hannah Humphrey (English, c. 1745-1818) from the Art Institute of Chicago.
Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. Investing involves risk.