Rudolph: "But you went off the side of the cliff." Yukon Cornelius: "Didn't I ever tell you about Bumbles? Bumbles bounce!” (“Rudolph the Red Nosed Reindeer” -- 1964)
Consensus continues throwing rocks at the stock market pinning last week’s woes on Russian instability, crude oil contagion, Greek government election, European Central Bank and its impending large-scale asset purchases, along with anxiety over the FOMC meeting. And, once again, the most “disliked market rally in history” reacted precisely as it has across every trampled hill and dale dating back to the late 2011 U.S. sovereign debt and growth fears to the U.S. Sequester, U.S. tapering, Italian elections, China, and every various and sundry crinkle in-between. It bounced back!
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Scarcely two months ago the investing rank-in-file grew sorrowfully resigned to a year of flat equity returns while visions of Santa Claus sprinkling good cheer amongst the brick chimneys below were silly at best. Those seemingly trapped with equity exposure during the mid-October low (S&P 500 1820.00) stir retrospective parallels of one visiting the island of Misfit Toys, regretfully coming to terms with the futility of the castaways including: Charlie-in-the-box, a toy train with a square wheeled caboose, or a cowboy who rides an ostrich -- likening them to current stock valuations, disinflation, and growth fears around the vast majority of Santa’s domain. And yet, “the bumble did bounce” and our stockings are presently over the fireplace warm and dry as we rejoice over last week’s 4.5% rally in just 48 hours.
Many financial experts portray this stock market “break and bounce back” behavior as symptomatic of an otherwise sickly bull market; one where Central Bank-administered cortisone shots and intravenous bags will eventually wear off -- allowing asset prices to rightly fall to their prospective trash bins. Personally, I liken it to attempting to sail the formidable Drake passage where the otherwise unimpeded waves of the vast Southern Ocean squeeze through the relatively narrow and shallow bottleneck, and in the process, generate complicated, unpredictable and often brutal weather. Yet, it eventually and hopefully gives way to a flat sea of calm. Other words, I am astonished that after so many years of extremely lenient monetary policy, the world around us still feels so rickety however, I recognize that we are in the midst of a policy experiment that hasn’t been attempted in 300 years and there are no maps or reference books to guide us.
Nietzsche once said a Romantic is someone who always longs to be elsewhere. If that’s correct then, the current investment consensus are Romantics, for they continuously crave to be someplace else -- straying to exotic places for that reassuring word, selling at the first wisp of trouble, buying when the coast is clear, and rebalancing when it is exclusively profitable.
Markets and managers will forever be judged by a calendar however, the macro-landscape knows no such parameter -- it’s an ever-living narrative with epic twists and turns. What’s worse is to take the most recent and/or well-documented headlines (i.e. Eurozone growth concerns, unsettling swings in global capital flows, impending currency wars, civil unrest/conflict, share downdraft in liquidity, global growth) and willfully attempt to fit those into a frame with a mindset that these events will have a greater impact on what will happen in 2015 as compared to something else. As “Recency Bias” would suggest, our recent experiences can and do cloud our judgment and cause us to assign greater weight to the relevance of what just happened in our decision making about what to do in our long-term plan and strategy. A smart investment plan is designed to use market volatility as its fuel for long-term outcomes. Altering the plan based on short-term guesses defeats every time.