As gratifying as it is has been to watch the portfolios we are managing gain in 2018 while everything else is dropping, we should also expect strong counter-trend rallies to keep punctuating the downtrend–for days, even weeks at a time. That is how bear markets typically move, and mental preparedness is critical.
A change to more dovish language in today’s Fed announcement, or a political tweet on trade, could easily prompt animal spirits to run another lap or two. That said, interim rallies are likely to be fleeting since the global downturn is so deservedly underway; and like never before, central banks, with still negative real rates and bloated balance sheets, have minuscule sticks to throw at it.
There are no quick Houdini-style escapes from what ails debt-heavy, cash-lite individuals, companies and market participants today. Payback, write-down periods tend to be hard work–arduous and seemingly relentless.
At the same time, price-discovery has been suppressed for so long, and participants have become so reckless and illiquid this cycle, that selling waves are likely to keep coming longer than anyone thinks possible.
Once those who could be seduced into irrational markets have already bought, only pent-up sellers remain. That is, at least until prices fall deep enough, and sentiment becomes so bleak, that sober capital finds risk worth-taking once more. We’re not there yet, but the cycle is definitely moving in the right direction. Best to stay calm and keep measuring.
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